Market Health Check: Motor - July 2017

The old Scouting motto 'be prepared' is probably as relevant as ever for the insurance industry - but how, when, what, why and where are all becoming problematic in its undertaking.

Insurers’ 2016 results were significantly hit by the drastic change of the discount rate from 2.5% to -0.75%.  In June, a report by EY showed that approximately £2.4bn of losses had been disclosed by insurers in their announcements, with more expected, with EY estimating the overall cost to be £3.5bn across all lines of business.  The report also said that the net combined ratio (NCR) for 2016 was at a high of 109.0%.  Without the Ogden change, the NCR would have been 100.2% (a slight improvement on 2015’s 100.5%).  EY expect this to deteriorate further in 2017, by as much as 3.1%.
 
This isn’t the only pressure on the market - there are of course some rather large changes going to affect the industry as a whole, and the motor market in particular.  The road to Brexit is going to throw huge challenges to the strategists and CEOs of the UK's insurance market, which are already starting to unfold - but could take several more to implement and for the full effect to be realised.
 
In addition, the much delayed reforms announced in the Autumn Statement of November 2015 and now awaiting debate in the Civil Liability Bill, have left the industry in limbo until final decisions are made on the implementation of changes to the Small Claims Track and tackling whiplash claims.  Again, this will bring about many changes, whether intended or not, as the market changes and players from all areas adapt new strategies to squeeze out what profits they can.  
 
One of the biggest problems facing motor insurers is the rising costs not just due to Ogden changes, but also the IPT increases over the last 12 months, and further rises in claims costs.  This pressure is being felt by consumers, who according to the latest ABI statistics, are seeing average car insurance premiums of £484 in the second quarter of 2017, the highest on record.  This is a 11% increase on Q2 2016 (the biggest increase the ABI has recorded), and 5% higher than Q1 2017.  Some slight respite is the small reduction in bodily injury claims costs in Q1 2017, which was £10,463 compared to £10,642 in the last quarter of 2016.  Unfortunately, this isn’t likely to continue given all of the above.  

Cost containment is very much the focus in the current market.  With insurers under immense pressure to pass on savings in the motor arena, how will insurers improve their competitiveness? Many insurers have gone through IT transformations and streamlined claims management, while some have withdrawn from unprofitable sectors.  

If this is set to continue, then there needs to be a balance between focusing on cost in the short term and focusing on the long term investment required in this changing market.