UK motor market set to return to loss

The UK motor insurance market is set to make a loss in 2014, after just one year in the black.

EY has forecast that “in order to reach a net combined ratio (NCR) of 100 percent, reserve releases would need to hit unprecedented levels of 14 percent, and as a result, in the long term premiums will inevitably be forced to rise.”

The industry is set to post a collective NCR of 109.3 percent in 2014, compared with the 98.5 percent it achieved last year.

This still requires insurers to release 5 percent from their prior year reserves, which is 2.2 percent less than in 2013.

EY said that in the past decade alone, reserve releases have varied from 13 percent release to 1 percent strengthening, but a 5 percent release is not insignificant.

EY’s prediction for 2015 isn’t any better, with an estimated NCR of 114.5 percent. It predicts the industry will see further losses and a real move away from any possible profit trend.

Catherine Barton, head of retail property & casualty actuarial, EMEIA at EY, said: “Repeating the NCR of 98.5 percent in 2013 looks nigh on impossible for 2014. Insurers are experiencing continued premium reductions while claims inflation – although less rampant than in recent years - is still tracking close to inflation. This can’t be expected to go on forever, making a premium rise in the near future inevitable.

“Reserve strength is key to understanding how much of a buffer insurers have to support their current year underwriting performance, and whether they can present positive results to their shareholders. The high reserve releases seen in 2013 were driven by just a small number of insurers rather than the whole market, and if similar high levels are not seen in 2014, the overall market performance could be even worse than our prediction.”

It reported that premiums have continued to fall, with a drop of 6 percent year on year. EY forecasts claims inflation of 1.3 percent in 2014, and increases to 2.6 percent in 2015 and explained this is driven by sustained bodily injury claims inflation, which mainly affects larger claims.

Barton added: “In spite of considerable reform in the motor market, claims costs continue to rise. Most focus to date has been targeted at controlling small claims costs. As reform hasn't been designed to deal with the cost of large claims, unsurprisingly they are still increasing.

"In such an already competitive market, the proposed Competition and Markets Authority (CMA) changes are likely to put pressure on profitability. Further, the CMA's focus on add-on product sales will likely pile pressure on insurers to make their money from underwriting rather than from add-on products.

“Ultimately, motor insurers still need to make money. Sooner or later underlying price rises for consumers will be inevitable for the market to be sustainable."