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UK motor insurers to enjoy a rebound while home insurers’ profits fall in 2018: EY

21st December 2017 - Author: Luke Gallin

UK motor insurers will likely enjoy a rebound in 2018 following the proposed revised Ogden discount rate, while home insurers’ profitability is expected to deteriorate in 2018, with or without extreme weather conditions, according to Tony Sault, UK General Insurance Leader for EY.

Ernst and Young logo“Last year was undoubtedly tough for the insurance market. This year, despite economic, regulatory and political challenges, there’s been an improved performance overall and we would expect this trend to continue into 2018. Although motor insurers will clearly be the greatest beneficiaries with the proposed revisions to the Ogden Rate announced in September,” said Sault, as part of EY’s General Insurance Industry Outlook 2018.

The then Lord Chancellor and Justice Secretary, Liz Truss, cut the Ogden rate to -0.75% at the beginning of 2017, a move scrutinised across the industry that has led to a call for a revised Ogden discount rate and recommendations from the House of Commons Justice Committee.

“The prospects for the motor industry improved dramatically after the publication in September of the proposed revised Ogden discount rate for personal injury claims. While the Justice Committee’s recommendations for the Government a couple of weeks ago on the draft Ogden rate legislation tempered things a little, we still expect the industry to be firmly back in the black next year,” said Sault.

Exactly what the Ogden discount rate revision will look like remains to be seen, but EY believes the most likely outcome is for the review to result in roughly £1.5 billion reclaimed from the £3.5 billion losses experienced last year, with premiums likely to fall by up to 3% on average, resulting in savings of up to £14 annually for the average motorist.

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“In addition to the Ogden changes, 2018 could also see the passage of the Civil Liability Bill. This would reduce the costs associated with bodily injury, potentially reducing premiums by an additional 8-10%, totalling a £59 per year saving once both reforms are fully implemented. Given these important changes in legislation, we now expect the motor insurance sector to be facing a far rosier 2018 compared to 2017 and predict a Net Combined Ratio (NCR) of 98.5%,” said Sault.

For the UK home insurance sector, which experienced a very challenging 2017, EY doesn’t anticipate a rebound likely to be seen by the motor industry, and instead warns of continued pressures over the next 12 months.

“We think 2018 will be equally demanding, and that this is likely to be the case even if the UK doesn’t experience extreme weather conditions. Fundamentally, this is an industry in transition where the challenges may last for several years. While there is evidence of the green shoots of new business, traditional players are being challenged by new technology and are having to invest in digital capability in order to keep up,” said Sault.

The array of challenges facing the UK home insurance sector have combined to drive down premiums, and increasing claims and costly inflation has exacerbated the situation for market participants.

“Taken together these issues have had a negative impact on profits with more deterioration expected to come,” continued Sault.

For 2017 UK home insurers are expected to record a net combined ratio (NCR) of 99%, based on the year ending with no major weather events. While in 2018, profit deterioration is expected to persist, with EY forecasting a 2018 NCR of 101.7%.

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