A warning to motor insurers

The story of Zenith insurance is one that the rest of the UK motor insurer market will pay particular attention to.

The fact is that Zenith is no different from many other motor insurers – in recent years, it has made its money from investment income, while its underwriting business has made a loss.

Delve a bit deeper, and you’ll see that Zenith's performance is nothing out of the ordinary against the rest of the market. Calculating figures from its 2008 accounts, it’s combined operating ratio – what it earns against what is pays out - is 103.4%. That means for every pound earned, it loses more than three pence. The average for the rest of the motor insurance industry is around 105%. Thanks to investment income returns, Zenith even made a small profit in 2008, at a time when the market was particularly soft.

So why is its parent company Guardian so keen to divest the former Lloyd’s syndicate? Perhaps Guardian sees no real potential growth for Zenith. Zenith is a broker-only insurer with a large book in personal lines motor. That space is dominated by direct players such as Direct Line and Admiral. Maybe Guardian recognises the future of personal lines motor insurance is through direct. But transforming that book into a direct business would be expensive, with no guaranteed success in a highly-competitve market.

Another factor could be the rising claims from credit hire and personal injury, something which ultimately led to Zenith dropping out of the ABI’s General Terms of Agreement earlier this year.

Finally, maybe Guardian cannot hold out for the return of a hard market, and along with a declining outlook in investments, has decided the time is right to pull out. In essence, it would rather concentrate its efforts in more lucrative areas of insurance.

The new owner, whoever that might be, will have to massively scale back capacity in the personal lines motor market arena which is being bled dry by credit hire and personal injury claims, while keeping hold of the more profitable areas of its fleet and commercial motor book. Guardian chief executive Jeff Mack is basically ruling out the possibility of run-off, so expect to see a sale, albeit at a basement price.

See story: Troubled Zenith in talks to secure sale by Christmas