The UK motor insurance industry - after cutting underwriting losses in 2012 - is in danger of being dragged back into turbulent waters, according to the 2013 UK Motor Insurance Industry Report by Towers Watson. In spite of the market’s improved 2012 combined operating ratio (COR), 2013 looks likely to show a return to under-performance in the industry.
According to the report, there are mixed signals on COR performance so far in 2013 from motor insurers. Anecdotal evidence suggests that a combination of banking the projected benefits of LASPO and other legal reforms too soon, together with continued competitive pressures on pricing and underwriting margins, must inevitably feed into insurers’ results. Fuelled by hefty recent price reductions the average cost of a comprehensive policy has now fallen by 23% since the end of 2011, it notes.
“Irrespective of COR performance at the mid-year, there is significant agreement that things have been heading in a less favourable direction as 2013 has progressed. As some senior industry figures have already pronounced, the industry has to acknowledge it has got some things wrong and take corrective action,” commented Karl Murphy, UK Head of General Insurance at Towers Watson.
Signs of these actions are already apparent. Among the trends the report notes is an increase of rigour around risk selection. This has resulted in certain companies reporting falls in premium income as they become more selective on the risks they are prepared to write.
Another area identified in the report for future competitive advantage is the use of data, particularly the sourcing and harvesting of external data sets, where it claims much of the industry has been slow to react. Analytical capabilities are also increasingly likely to play a key role in telematics, which Towers Watson believes is a potential game changer for motor underwriting and pricing.
The report also recommends other areas where primary insurers may need to look at alternative strategies for effective risk management. These include dealing with PPOs, which have pushed the cost of long-term care of serious accident victims onto motor insurers, and the need for new approaches to maintain historic investment performance. The issue of effective expense management has also raised its head as expense ratios rose in 2012.
Karl Murphy said: “Insurance executives will need to take strong action to steer the industry through this resumption in the downward cycle.”
“The current situation could almost be characterised as an internal struggle between a solid underwriting approach and the need for competitive pricing. Clearly, the two are not mutually exclusive, but whichever view prevails will go a long way to determining near-term prospects,” he added.
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