With Deloitte urging motor insurers to put up rates to raise profits,Verity Adams speaks to the leading figures in the motor market to discover what the future holds for the industry
Just as the wheels of a car spin round, the motor insurance market goes in cycles, and it is of no surprise to say it is currently at a low point. But it is predicted that 2007 will bring change. And, Deloitte contends that by 2010 market competition will increase significantly.
Most importantly, says Deloitte, rates have got to start going up if profits are to be made.
Back in September Norwich Union (NU) got the ball rolling when it announced moves to increase its motor premiums by up to 40%. Unfortunately, say brokers, this move has not been rapidly followed by the remainder of the market.
Royal Bank of Scotland (RBS) is planning to put up rates - but by just 1% a month for six months. An increase of just 6%. Allianz Cornhill has also committed to reviewing rates - but not until next year.
It is an unsurprising response. After all, who wants to be the first one to be seen shedding volume?
Deloitte actuary James Rakow says: "For the market to turn, premiums have to start going up now and there are early signs of that. If they start to go up now and continue next year that will be enough on the income side to stop the market getting worse."
By 2010, motor experts predict the market will have entered a new phase. Deloitte says there will be fewer players and private equity providers will have exited the market. What does this mean for the future of the motor sector?
Managing director of affinity player Junction Phil Zeidler has reservations about new capital coming into the market. He adds he would be reticent to invest his own cash into the motor market in its current state.
"That said, as market rates begin to harden that's a good time to build a book of business," he says. However, for
brokers it is a good time to grab market share, he adds.
Yet he forsees a growing trend towards consumer brands such as Tesco and M&S who are looking to take a significant portion of the market. This, he suggests, will put pressure on distribution.
He says: "The internet will deliver low retention rates for insurers. 2010 might end up looking better than 2008/09 but I'm not sure how much compared to current status."
Deloitte forecasts internet distribution will soar from 30% in 2006 to 45% in 2008.
Paul Chaplain, underwriting director for Fortis, expresses surprise at the huge reserve releases in 2005. He says there will be further releases this year but it would be surprising if this continued at the current trend.
Fortis has already implemented some rate increases and feels market consensus indicates a rise of around 6%. Fortis predicts a motor underwriting profit will be announced by the insurer at the end of 2006.
The insurer has remained a strong player in motor, and for the first nine months of 2006 private motor grew by 4%, to £299.6m gross written premium (GWP).
Chaplain adds that brokers will continue to have a strong presence in the market. He said some have shown good internet capabilities and have launched decent quote engines, which is an added attraction for the customer.
Keith Charlton, active underwriter at Equity, agrees that rates are on the rise. He points out that NU had already increased its rates and RBS is also a likely contender to hike premium levels particularly as its banking backers will want to see a return on business.
Charlton predicts that motor will see a number of niche players staying independent or being sucked up. "As time goes by it will get more difficult to enter, but there has always been space for niche players."
Erik Johnson, assistant manager with Deloitte's insurance strategy team, feels niche players will continue to be established in Gibraltar.
It will be followed by more premiums and a flow of staff. He adds, it is still unclear the extent to which Solvency II will impact on the market.
Laurence Loughnane, head of pricing at NU, says: "We have seen the start of more rate increases across the board.
"We've been ahead of the market with increases of about 16% and our view is the rest of the market needs small increases. We need less talk and more action."
Loughnane says it is still difficult to predict how much reserve releases there have been in 2006. In 2005 there were record releases of £600m.
The motor market, beneath the top players, is becoming increasingly fragmented and Loughnane expects that there will be a raft of new players entering the market, as well as a few deaths and marriages.
However Loughnane sees the market being advanced by emerging technology, including the NU's 'pay as you drive' scheme launched earlier this year. He says this will open up an opportunity to "price more accurately" and rejects it as a threat to brokers.
NU reported a £33m underwriting loss on its private motor book in the first six months of 2006.
This was more than double the loss in the first half of 2005. Increasing rates, says Loughnane, is aimed at putting the insurer back in a strong position.
Deloitte's Predictionsfor 2010
