Motor insurance premiums may fall following UK whiplash claim focus

As the UK government proposes to cap compensation for whiplash injuries, motor insurance premiums are likely to fall, according to Fitch Ratings.

However, the ratings agency also stated that insurers will want to see evidence of falling claims before it implements any reductions, and therefore premiums are unlikely to decline in the short term.

As part of the government’s proposal the capped compensation would require medical evidence before a claim is settled.

Furthermore, the proposal raises the limit on the value of personal injury claims that can go through the small claims court.

Fitch expects these reforms to reduce the costs of claims and competitive nature of the UK motor insurance market means savings will eventually be passed to customers.

However, Fitch believes premiums will only begin to fall if there is evidence that these new measures are working.

Insurance firms have previously overestimated the impact of trials to deduct personal injury claims, significantly weakening their underwriting performance, Fitch added.

According to the ratings agency, insurers’ premiums dropped by nearly a quarter in 2012 and 2013, partly due to a crackdown on personal-injury related fees. This pushed the accident year combined ratio - a measure of claims to premiums - up to 112 percent in 2014, from 103 percent in 2011.

Fitch does not see a significant impact on prices before 2018, as the government will be consulting on its proposals until early January, and would then need time to implement them.
As a result, premiums in 2017 are expected to remain flat or to rise by low single digits, in line with claims inflation.

“UK motor premiums have been rising since early 2015 as insurers have increased their focus on underwriting profitability. A moderate decline in premium growth should be neutral for insurers, as long as it follows a fall in claim costs. However, an immediate reduction in premiums could be negative for firms' credit profiles, if the expected savings on claims do not materialise,” Fitch concluded.