UK motor insurers' profit under pressure as higher claims outweigh prices gains

The pricing improvement for UK motor insurers during Q4 2019, when the average comprehensive motor insurance premium paid rose 3 percent compared to Q3, is credit positive for the industry, as it will partly compensate for persistently high claims inflation, Moody’s Investor Services has said in a sector comment report.

According to the Association of British Insurers (ABI), motor insurers' repair bill rose 11 percent in the first half of 2019 compared with the same period of 2018. The increase also reflected a weaker pound, which pushed up the cost of imported spare parts.

“Claims inflation is driven in part by rising repair costs, reflecting more sophisticated vehicle designs and in-car technology,” said Moody’s.

“However, current price increases continue to fall short of the claims inflation reported by motor insurers. Given highly competitive conditions in the market, we believe only a gradual price adjustment will be possible. This will erode insurers' underwriting results, further challenging the sector's historically weak profitability.”

Moody’s said the lag between price increases and claims inflation will exacerbate pressure on some insurers from a lower-than-expected increase in the discount rate that UK courts use to calculate lump sum compensation payments to personal injury victims (known as the Ogden rate) in July 2019.

“This will negatively affect the industry's long-term earnings, unless insurers are able to raise prices sufficiently to offset the additional increase in claims costs,” it said. “The revision of the Ogden rate has also affected reinsurers with exposure to the UK motor liability sector and, according to Willis Re, has led to market-wide excess of loss repricing, thereby increasing UK motor insurers' costs.”

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