UK motor insurers headed for underwriting losses as inflation bites

UK motor insurers are expected to swing to an underwriting loss this year and next according to a fresh forecast, as surging inflation reverses the fortunes of a sector that had been one of the winners of the pandemic.

Quieter roads continued to boost car insurers last year, with the sector posting a net combined ratio — claims and expenses as a proportion of premiums — of 96.6 per cent, according to data from consultancy EY. Anything under 100 per cent represents an underwriting profit. That followed a record 90.3 per cent touched in 2020.

However sharper inflation, especially for second-hand car prices, is already driving claims costs higher. Premium rates, meanwhile, have fallen during the pandemic. The resulting squeeze, EY forecasts, will push the market to a lossmaking combined ratio of 113.8 per cent this year and 111.1 per cent in 2023.

Insurers have been “caught cold about just how bad inflation turned out to be”, said Rodney Bonnard, UK insurance leader at EY. Now, he said, there were “quite a few headwinds coming together” with accident frequency rising after the pandemic lull and inflation accelerating, just as insurers respond to a complicated pricing reform.

Share prices of motor insurers have fallen this year as the inflation outlook has worsened, with Admiral’s stock down about 27 per cent and Direct Line about 11 per cent, outpacing a wider decline in UK stocks.

Insurance chiefs have warned of the inflation threat in recent months. Direct Line’s chief executive Penny James said in May that premiums had not yet “fully factored in” the rise in claims costs expected across the year, and the insurer had cut back marketing efforts in the first quarter.

The sector is also coming to terms with new pricing rules, effective from January, which stamped out so-called loyalty penalties for existing customers. The general effect has been to push new business prices up, and renewal prices down.

But overall, the cost of insurance actually fell 5 per cent in the first quarter from the previous one, according to EY’s numbers, as insurers navigated the new pricing environment. Profits will also be affected by reserve releases, where insurers bolster their profits by releasing money they had previously set aside for expected claims.

Paul De’Ath, head of market intelligence at consultancy Oxbow Partners, said a key question is how much of that Covid-era “war chest” companies will be willing to release to prop up profits. “We’ve got a lot of things going on at the same time,” said De’Ath.

EY’s numbers do anticipate greater-than-usual reserve releases for 2022, and assume that accident frequency does not snap back to pre-pandemic levels.


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