Analysts at Moody’s have reported that claims in the UK motor insurance sector are increasing at a faster pace than premium pricing, which is challenging the profitability of the market.
According to the Association of British Insurers (ABI), the average comprehensive motor insurance premium paid in the UK during the fourth quarter of 2019 was 3% compared with previous quarter.
However, the average premium for 2019 as a whole fell 1% relative to 2018, compared with claims inflation estimated at 5-8%.
The 3% gain in UK motor insurance prices in Q4 also followed a 5% decline spread over seven quarters beginning in Q4 2017.
At the same time, the average annual comprehensive motor premium paid over 2019 as a whole was £471, down from £477 in 2018.
Claims inflation is driven in part by rising repair costs due to more sophisticated vehicle designs and in-car technology, with repair bills rising 11% in the first half of 2019 alone.
But Moody’s believes only gradual price adjustments will be possible in UK motor, given the highly competitive conditions in the market, meaning insurers’ underwriting results are likely to be eroded further.
This lag between price increases and claims inflation will be further exacerbated by the lower-than-expected increase in the Ogden rate that UK courts use to calculate lump sum compensation payments to personal injury victims.
Analysts also noted that the revision of the Ogden rate has affected reinsurers with exposure to the UK motor liability sector and has led to market-wide excess of loss repricing, thereby increasing UK motor insurers’ costs.
Other sources of uncertainty for the UK motor sector include the outcome of a pending review by the Financial Conduct Authority (FCA), which aims to ensure that non-life insurers’ existing customers do not pay more than new ones.
Furthermore, reforms aimed at reducing the number of fraudulent and exaggerated whiplash claims are due to be implemented in April 2020.
While these reforms are likely to help the sector, Moody’s expects insurers to pass on the resultant benefits to their customers in the form of lower premiums.
