Bodily injury claims are an industry-wide issue, so what’s the prognosis for the other motor insurers?
RBSI’s £320m motor reserve hike in the second quarter, which forced the insurer to make a £253m operating loss in the first half of 2010, is a stark example of the effects rising bodily injury claims are having on UK general insurers’ motor books. And there could be more pain to come. RBSI chief Paul Geddes would not rule out future reserve increases for prior years given the uncertainly around the future development of bodily injury claims.
However, this does not mean that all UK personal lines motor insurers should expect to take heavy reserve hits.
RBSI chief executive Paul Geddes describes bodily injury claims inflation as an industry issue, explaining that his company had such a big hit because of its large share of the UK motor market – 22% – and the fact that motor makes up half its book.
The insurer, which owns well-known motor insurance brands such as Direct Line and Churchill, is certainly not alone. Insurance Australia Group was forced to inject £206m into the prior-year reserves of its UK subsidiary, Equity Red Star, to cope with rising bodily injury claims. Brit announced with its first-half results that it had cut its UK private motor book by 60% because it no longer considered it a sustainable business.
No surprises
Mmany of the listed insurers that published their results in the week of 2 August, while revealing that their results had been hit by rising bodily injury inflation, did not have to boost reserves, however.
RSA UK chief Adrian Brown, for example, says: “There have been no shocks or surprises to our result, unlike some firms I could mention that have significantly increased their reserves [because of bodily injury claims].”
He adds: “Prior-year reserves in our UK business was pretty much flat year on year – we had the same amount of prior-year reserve releases as we had in 2009.”
And those who have yet to report, such as Admiral, which derived 96% of its 2009 profit from UK car insurance, are also unlikely to shock the market with large reserve increases,
“I’m not expecting others to start coming out with big surprises in terms of bodily injury reserve hits because that is being increasingly priced into current year reserving,” says European equity analyst at investment bank Jefferies, James Shuck.
Scrubbed up for sale
He adds that RBSI’s problems may be more as a result of its current situation. The European Commission requires RBSI’s parent, The Royal Bank of Scotland, to divest the company in 2013 as a condition of its 2008 bail-out by the UK government.
“They are dressing it up for a sale and therefore there is a certain amount of reserve-cleaning that’s going through,” Shuck says.
Admiral in particular is highly unlikely to give the market any nasty surprises. “Admiral seems to have got around the problem through superior risk selection,” Shuck says. “It settles whiplash claims very quickly, for example, in order to avoid the associated legal cost.”
Another market analyst adds: “You would have to be pretty surprised if Admiral come out with a shock on this. These are not new issues.”
Seeing the positive
In fact, Shuck believes Admiral could benefit from RBSI’s and others’ woes. “Industry pricing remains firmly on an upward trend in 2010 and we continue to believe that Admiral can benefit. In particular, we see upside risks to policy growth given the problems at RBSI and Quinn Direct, as well as sustained rate increases across the industry,” Shuck wrote in a research note after RBSI’s results were released.
He adds that he expected the company to report an accelerated policy growth compared with the first quarter when it releases its results in two weeks.
