Why the car insurance industry faces a difficult future

 
Catherine Barton

The Competition and Market Authority's (CMA) proposed plans for change in the private motor insurance market aim to increase competition and reduce the cost of premiums for motorists. If implemented, they stand to do just that. This is great news for customers, but what does this mean for an industry that is already exceptionally competitive, and where premiums have naturally been driven right down? Motor insurers have long been walking a very precarious tight-rope balance between profit and loss-making. Now, after 20 years in the red in terms of underwriting profit, they finally made it into the black in 2013. But could these changes push them back?

The proposals set out two main categories of change. The first aims to better provide price competition for customers by enabling each of the major price comparison websites to offer different prices for the same insurance product. In effect, this would increase competition. This does raise a fundamental question: how low can premiums go, and what will change to push motor underwriting back onto the 2013 profit track? More control around the costs insurers incur in settling claims could be a possible solution, but with a rampant claims culture and the inherent issues around proof of soft tissue injury, there needs to be fundamental cultural reform, driven by a fully watertight referral fee ban.

The second main area the CMA’s proposals aims to improve is around communication between insurers and their customers. In a digital age, with multiple channels offering instant communications, this is a real area for competition. If customers are better armed with information that will help them to make informed decisions around their cover options, the add-ons market could benefit in terms of product development aligning more to customers’ needs. However, if not, it could have serious consequences for insurers’ bottom lines and push premiums up in the long term, not down. Add-on products currently prop up the unprofitable underwriting of motor insurers; if insurers cannot replace this income, profits will drop and as a result premiums may actually increase.

Insurers’ results have been supported by significant reserve releases for the past few years. If their profits are squeezed further, the path of increasing reserve releases is likely to continue and the reserves will deplete. At this point, insurers will have no choice but to put premiums up.

The CMA's consultation phase lasts until September, but the recommended changes are clear. Insurers need to start thinking about how they can comply with the proposed changes, without slumping back into the red. While it is true that claims inflation has tempered since the referral fees ban, claims costs are still increasing overall and the claims culture is still very much alive. With further lowering of premiums, the profit insurers experienced in 2013 after two decades of loss-making will likely be a blip, which is not good news for premiums in the long run, and is not good news for insurers.

Catherine Barton is head of retail property & casualty actuarial, EMEIA at EY.