Summer floods indirectly contribute to pressure for a price hike
Motor insurance premiums in the UK are set to rise by around 10% in the coming year, according to analysis by EMB, Europe’s largest firm of non-life actuaries. Despite the widespread public feeling that premiums are already too high, researchers found that motor insurers are not charging sustainable premium rates, particularly for private motor.
The conclusion is based on EMB’s annual review of the returns that all insurers in the UK make to the FSA (Financial Services Authority). Their findings show that the £10 billion market was able to achieve a modest profit during 2006 only by releasing more than £800 million in reserves from previous years. Even with these releases, they relied on investments to make good the shortfall between premiums and the amount they spent on claims and expenses.
For every £100 of premium motor insurers received they paid out £83 in claims and £28 in expenses, giving a total cost of £111. As there is a time difference between receipt of premiums and payment of claims, insurers generated investment income to offset costs equivalent to £5. This meant the average true cost to the motor insurer was £106 per £100 of premium charged in 2006. (Equivalent figure for 2005 was £104, £100 in 2004.)
“Our analysis shows that insurers have been able to subsidise motor premiums because of reserve releases due to better than expected levels of personal injury claims in the past few years, but this won’t go on forever. If they hadn't had these reserves to release, the results would have been totally unacceptable,” said senior consultant Paul Moorshead.
EMB believe, furthermore, that the summer flooding is bound to have a knock-on effect on the motor insurance market.
“Since the last major UK catastrophe [the 1990 storms] property had been a highly profitable line of business for personal lines insurers. There’s clear evidence that they’ve been using some of these profits to cross-subsidise their Motor book. That will stop in light of the heavy claims they’re getting from the floods,” said Moorshead.
“It’s still a very competitive market out there, but the upward pressures on pricing are just too strong. Even with the premium increases that we’re predicting, many motor insurers will end the year with significant underwriting losses.”
