The UK motor insurance market achieved an underwriting profit in 2022, largely due to post-pandemic factors, including low levels of commuting resulting in fewer claims.
Motor insurers last year recorded a Net Combined Ratio (NCR) of 96.6%, according to EY’s latest UK Motor Insurance Results, which followed a NCR of 90.3% in 2021 – the industry’s best ever result.
According to Global Insurance Markets Trends and Forcasts, there are significant challenges on the horizon. Consumer premium rates have remained fairly low and are far below the level needed to keep pace with inflation and the return to more normal traffic levels. This means the 2022 and 2023 environment will be tough, even if the market is able to increase rates rapidly over the second half of this year.
However, profitability is likely to be short-lived. Inflation, which had already been growing over the past couple of years due to supply chain issues affected by COVID-19, is expected to climb even higher in 2022 as materials, labour and energy price rises feed through into claims costs (see World’s Largest Insurance Markets). In addition, premium rates are currently sitting at a low level following the implementation of the FCA’s pricing reforms, with rates having fallen sharply in Q1 2022 by 5%.
Claims inflation is accelerating at a pace that United Kingdom motor insurers cannot keep up with. Even with prices rising, according to a new report by Jefferies the, it expects margins to deteriorate significantly:
We expect DLG to cut its 2022 dividend, prompting us to downgrade our rating to Hold. Commissions will likely be at much lower levels given worsening margins, prompting us to downgrade our rating to Underperform.Jefferies
Sabre’s recent profit warning indicates an even worse outlook than expected, worsening guidance to a mid 90%’s combined ratio compared to 79.4% in 2021 – well above its 70-80% target range.
Is a result of rapidly increasing inflation’s impact on reserving, with claims severity increasing to +12% in Q2 this year compared to +8% in 2021. This is consistent with claims inflation across the market, which continues to run at very high levels (car damage inflation is +13% in Q2), whilst market pricing has been unable to keep up (new business premiums only up +9% YoY in May).
The company estimates a market combined ratio of 116% for 2022F (EY estimates 114%).
Admiral is expected to report a current year loss ratio of 94% in 2022. The 2022 underwriting year combined ratio at half-year will be particularly important, and is likely to disappoint.
The report forecasts an initial underwriting year combined ratio of 115% and 113% for 2022-23F which will subdue profit commissions going forward (see Underwriting Transformation Survey).
EY predicts that the Net Combined Ratio (NCR) for 2022 will be a loss-making 113.8% and 111.1% in 2023.
Premiums set for small 2% (£8 per policy) rise in 2022 but predicted to rise by 18% next year (£81 per policy) due to inflation
Premiums remained relatively low over the course of 2021 and fell even further in the first quarter of 2022, prompted by a decline in renewal pricing as the FCA pricing reforms came into effect.
Looking ahead, however, premiums are expected to rise sharply next year as inflationary pressures feed through into claims costs.
EY expects consumer premiums to rise by a marginal 2% (£8 per policy) over 2022, with a much larger increase forecast next year, leading to an 18% (£81 per policy) increase for 2023.
Rodney Bonnard, UK Insurance Leader at EY, comments: “The sector has had a good couple of years, but the profitability achieved during the pandemic is largely masking the underlying impact of inflation amid an increasingly soft market. Going forward, motor insurers will need to continue to very carefully manage their cost challenges while developing a platform for growth.”
Richard Reed, UK General Insurance Market Lead at EY, concludes: “2021 was another profitable year for motor insurers. Big shifts in working patterns during the pandemic resulted in reduced commuting and rush hour traffic, leading to fewer accidents and claims. Separately, the new whiplash claims process has reduced legal costs and compensation levels.