UK motor and home insurers to fall into red in 2022, warns EY analysts

UK home and motor insurers are likely to achieve profitability this year due to low claims levels during the COVID-19 lockdown and changing driving patterns, but 2022 is expected to be a loss-making year for both lines of business as inflation remains high and premium rates are suppressed due to the FCA pricing reforms.

EY’s latest analysis indicates that the FCA pricing regime that comes into effect from January 1, 2022 will represent one of the biggest regulatory interventions ever seen in the general insurance market. But noted that there remains a “high degree of uncertainty” as to how overall premiums across home and motor lines will be impacted.

According to its report, UK motor insurers are expected to achieve an underwriting profit in 2021 with a net combined ratio of 97 percent. However, in the coming year the net combined ratio is predicted to return to a loss making 112 percent, with claims costs expected to be 25 percent higher than in this year, due to the lockdown in the first part of 2021. At the same time, underlying inflation, premium rate falls and costs associated with the FCA’s Pricing Review will also impact profitability.

The report also highlighted that the launch of new whiplash claims process and insurers' focus on retaining customers ahead of the FCA pricing reforms has impacted premium rates, driving a further fall to 7 percent in 2021 - the lowest since 2015.

“Despite overall traffic volume returning close to 2019’s level, motor claims remain lower than expected. This is due to material shifts in driving patterns that appear to be sticking; there are fewer cars on the road during rush hour and less motorway journeys,” explained Tony Sault (pictured), UK general insurance leader at EY.

“Looking ahead, the outlook for high inflation is set to dampen profitability,” he added.

Meanwhile, the UK home insurers are forecast to attain only a small profit in 2021, with “high inflation negating much of the benefit of lockdown-related low claims”, before falling into loss-making territory in 2022. The net combined ratio for 2021 is predicted to be 99.4 percent, worsening on the previous year's 97.6 percent when claims volumes fell more significantly due to the multiple lockdowns. “Profitability, however, isn’t likely to last long,” noted EY, as the industry is expected to close 2022 with a loss-making NCR of 101.6 percent.

Overall, premium rates are predicted to be 1.5 percent higher over H2 2021 than they were in 2020 as insurers respond to inflationary pressures, according to the report. But, they are likely to remain flat over 2022 when the new FCA pricing regime comes into force.

“While the home insurance sector is set to be profitable this year, it is likely short-term and high inflation will be a drag on profitability levels into 2022. The costs associated with the regulator’s pricing reforms will also add to the sector’s financial challenges as they look to overhaul their pricing models,” said Sault.

Rodney Bonnard, UK insurance leader at EY, added: “While there are a number of known challenges and opportunities as we look ahead, there is a great deal of uncertainty too. COVID-19 has had a significant impact on claims patterns and costs over the last eighteen months and while we are expecting some of this to unwind over the coming months as more people return to the office, no one knows if there will be further lockdowns, how hybrid working will settle in, and how much life really will return to the pre-pandemic ‘normal’. There is also uncertainty around how long the high inflation we’re currently seeing will last and how this will play out in claims data during the remainder of 2021 and into 2022.

“There is certainly a lot for the home and motor insurance industries to contend with and overcome if they are to achieve profitability over the coming years.

“Important issues to get on top of increasingly include ESG, which is in the spotlight now amid COP26. Insurers have a vital role to play to counter climate change both internally and as the major players in the flow of green capital.”

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