Losses propped up by prior year reserves
Private motor insurers smashed through the £1billion underwriting loss barrier in 2008, according to latest research.
Insurers reported a £493m loss in 2008 - but that doesn't include prior year reserve releases. It is more than double the amount reported to the Financial Services Authority (FSA).
Ryan Warren, senior consultant at Watson Wyatt, said: "These insurers have tried to bolster their results by releasing money from their reserves, therefore disguising the actual underlying performance of the business. By removing these reserves and allocating them to the year they actually come from, we were able to identify and better understand the true underlying profitability of the market."
According to the research, the 2008 result was slightly better than the 2007 underwriting loss of over £1.1 billion and represents a break in a continuous trend of losses which started in 2004 - the only profitable year in the past decade, when the market made a profit of £77 million.
Ryan Warren said: "There are a few reasons for the slightly improved results in 2008 including a reduction in the number of claims, a slight increase in rates and the restructuring of reinsurance programmes leading to savings in reinsurance spend. However, despite car insurers pursuing some of these strategies, many still struggled to break even last year."
Watson Wyatt expects the industry to be profitable next year - when projected underwriting losses fall from the current 15% of earned premiums to 6% - with a 2% pa return on capital, after allowing for investment returns.
However, the firm warns that despite a likely improvement in profitability these companies face still significant headwinds including: clients regularly changing insurer or policy often aided by comparison websites which have increased pricing transparency; an increase in the number of third-party bodily injury claims; the risk that the recessionary environment increases fraudulent claims; the greater likelihood of periodic payments; and the move towards higher excess policies which reduce average premiums.
Warren said: "Insurers in this sector face multiple risks to their businesses in the next few years and we expect them to counteract these by increasing premium rates, cutting costs and reducing the number of claims. Increased vigilance over potentially fraudulent claims will also be a top priority for them in this current environment."
