Briefing: Motor insurers should not just be worried about pressures on profitability

By Matt Scott 

The motor insurance market is one of the biggest and most developed in the UK, but high levels of claims, a growing regulatory burden and a rapidly rising cost base has made it one of the most competitive and difficult business lines in which to operate.

That is even before the commoditisation of the market is considered, which has led to a stripping back of core policy features and a race to the bottom on price.

Many providers in the market have sought to combat this through the use of technology – whether it be developing AI solutions to better assess and process claims, creating telematics products to facilitate better risk pricing or introducing increasingly sophisticated anti-fraud measures.

To date, however, none of these solutions have been fully effective and the market continues to struggle for profitability.

Recent analysis I carried out for Insurance DataLab found that motor insurers based in the UK and Gibraltar – the latter of which underwrites around a third of the UK’s cars – reported a 111% combined operating ratio (COR) in 2022, with the aggregate loss ratio rising by a worrying 13 percentage points.

Claims inflation has, of course, played a significant role in this worsening position and the situation shows little signs of easing up as we progress through 2023.

FCA intervention 

Then there is Consumer Duty – the seemingly all encompassing new regulatory regime that comes into the force at the end of July.

And if insurers are worried about the pressures facing their profitability, then they certainly should be worried about the potential for regulatory intervention from the FCA.

My analysis also found that motor insurance is the most complained about business line in UKGI – which should not be a total surprise given the size of the market – but it also has a stubbornly high upheld rate.

In the first quarter of 2023, the Financial Ombudsman Service (FOS) found in favour of the customer in 34% of all motor complaints – meaning that the ombudsman felt motor insurers get their decisions wrong more than a third of the time.

This position is simply unsustainable given the current regulatory landscape and something must certainly change if the FCA is not to come down heavily on the poorest performers in the market.

Insurers need to do a much better job of clearly and concisely explaining what is and is not covered under a policy, as well as being much fairer with the costs they charge for things like mid-term adjustments and premium financing.

This would not only help cut down on both the volume of overall claims and the FOS upheld rate, but also help drive down costs. Two things that motor insurers are certainly in need of.