EY: motor market has softened too soon

Pricing in the UK motor insurance market has softened before the industry has had an opportunity to make an underwriting profit, according to accounting firm Ernst & Young (EY).

EY’s analysis of the UK motor market’s 2012 results show that the industry as a whole reported a combined operating ratio (COR ) of 102.6% that year, a 1.6 percentage point improvement on 2011’s COR.

The company said the result was the strongest since 2007, but noted that it was still above the 100% break-even mark, meaning another unprofitable year, and that the COR would worsen again in 2013.

Turning too soon

EY financial services partner Catherine Barton said: “On the face of it, the reported results for 2012 are really good. In fact they’re a marked improvement on 2010 figures. However, as we feared, a closer look at the results reveals that the market has turned too soon.

“The market isn’t behaving rationally as prices are already falling too quickly, driven by insurers who have returned to profit and those who are looking to grow. As a result, we expect 2013 and 2014 to be difficult for those who have not yet got their houses in order.”

2013 COR to rise to 106.8%

EY’s analysis found that a third of UK motor insurers made an underwriting profit in 2012, while two-thirds made an overall profit when factoring in ancillary and investment income.

However, looking forward to 2013, the company expects April’s Laspo legal reforms and changes in the claims environment to have a detrimental effect on overall profitability.

EY predicts the 2013 COR will rise to 106.8%, and that only a third of companies will post an overall profit.

Barton said: “The market has already softened as participants chase after customers, and we expect there to be a complete reversal of the picture for next year’s results.”

FCA pressure

EY also expects the Financial Conduct Authority (FCA)’s increased focus on consumer protection to affect insurers’ business models. The regulator, which took over from the FSA in April, is determined to ensure customers are clear about what they are buying and that they are paying a fair price.

Barton said: “There will be a lot of uncertainty for insurers about whether their current business models will stack up. Insurers need to acquire a retail mentality, focusing on getting the right products to their chosen customers via selected distribution channels be that brokers, direct or aggregators.”

Business model key

EY concluded that business model, rather than size, is the key to profitability.

Barton said: “It’s clear from the results that profitability is uncorrelated to size. It is about how well insurers are using data, their cost models and how they use brands in the market.

“As well as improving their customer experience, insurers will need to reduce their operating costs if they are to compete effectively.”