It was the news that the UK motor insurance industry had long awaited; the achievement of its first underwriting profit in 20 years. In 2013, a combined operating ratio of 98.5% was recorded, after two decades of disappointment. This result was achieved despite a continued drop in motor premiums and a soar in the number of fraudulent claims. So does this indicate a turning point in the motor insurance market? Has the struggle for many insurers finally come to an end?
Analysts are certainly sceptical, largely due to the prime driver behind this favourable result; the substantial release of reserves. According to research by EY, the combined operating ratio excluding such releases would have been recorded at 105.7%. Reserve releases increased 7.2% since 2010, a rise that cannot be sustained in the future. In this blog we discuss the recent levels of motor insurance premiums, and the factors contributing to this performance.
Premiums are still falling (2012-2014)
Motor premiums have been falling since 2012. Figures from the Association of British Insurers show that the average cost of a private comprehensive motor insurance policy has fallen by 11% since the start of 2012 to the end of 2013. All age bands have benefitted from premium reductions. A combination of factors have led to the persistent decrease in premiums, such as legislative changes and increased competition in the industry.
The European wide Gender Directive was introduced on 21 December 2012, banning the use of gender as a rating factor for insurance pricing. We have been tracking the motor premiums for a 25 year old male on various comparison websites. The graph below displays the average of the lowest 5 premiums that we have monitored each quarter for the past three years. The green line displays the Gender Directive implementation date.
Source: Barnett Waddingham
Premiums clearly converged during the three month build up to the Gender Directive implementation, as insurers prepared for the unisex pricing. Downward pressure continued to influence premiums over the most recent two years, as a result of increased competition within the market and the implementation of the Legal Aid, Sentencing and Punishment of Offenders (LAPSO) Act that was effected on 1 April 2013. Amongst other reforms, the LASPO Act prohibited the use of referral fees in personal injury cases.
The ban on referral fees has led to a reduction in the number of claims management companies (CMCs). The number of registered CMCs fell from 2,300 at the start of 2013 to 1,200 at the end of May 2014. Further stringent legislation for CMCs is currently being discussed, such as hefty fines for bombarding individuals with nuisance calls. Fewer CMCs has meant that less encouragement to claim has occurred within the market. This has helped insurers to rein the volume of bodily injury claims under control, and has resulted in downward pressure on premiums.
Competition and Price Sensitivity
Accompanying the legislative changes, competition intensified within the motor insurance industry due to the increased use of comparison websites. This resulted in downward pressure being applied to premiums. One only has to inspect these websites to see that there is a hoard of providers out there, with different insurers entering the market on a weekly basis.
The increased use of comparison websites has also had a strong impact on consumer choices, due to the UK motor insurance market being extremely price sensitive. Comparison websites allow customers to browse the quotes that each motor insurer offers and instantly identify their cheapest option. Price sensitivity is not seen throughout Europe however, where the UK shows the greatest sensitivity across countries. In Germany, policyholders are far more concerned with the extra benefits that accompany each policy. German customers did not rank price in the top six factors that they consider when choosing a motor insurance product. Quality of product and the financial stability of the insurer also featured highly for Germany customers.
Expected perpetual increase in premiums (1994-2011)
Prior to the recent two-year decrease in premiums, the motor insurance industry endured the fastest upward spiral in premiums on record. Premiums had been gradually ascending since the AA began monitoring the British Insurance Premium Index in 1994.
Source: AA British Premium Index
The premium increase accelerated in 2009 and 2010 (blue line), with the huge volume of bodily injury claims being the core driver behind this. The market even reached the point where for every £1 paid in premium, £1.50 was paid out in claims. Rigorous measures were implemented by the government (described above), which appear to have worked over the past two years.
The number of fictitious and exaggerated bodily injury claims have placed an enormous burden upon insurers. Crash for cash incidents reached a value of over £10 million last year, increasing in number by 51%, according to research by Aviva. These events are becoming more prevalent as well as more sophisticated. Organised fraud gangs are choosing their targets logically in order to maximise their likely pay-out. Recent figures revealed that professional vehicles, such as vans, are targeted in one third of crash for cash claims. These vehicles are appealing to fraudsters because they are likely to be fully insured and their drivers are often working to tight schedules so are less likely to dispute the claim. Industry experts have stated that unless a severe crackdown on these fraudulent gangs occurs, insurers will have no choice but to increase premiums to offset this huge liability.
Motor premiums cannot persist to fall forever. After two years of decreases, industry experts are anticipating a premium rise on the horizon. Unless the fraudulent claim culture described above is curbed, premium increases are inevitable. The future may be bright with the use of Telematics appearing to take off, particularly within fleets. Professional vehicles that are equipped with a telematics device are able to disprove exaggerated claims, which in turn should decrease the fraudulent appeal. Nonetheless, 2013 was a positive year for motor insurers and time will tell when the turning point for the industry truly emerges.