THE BRITISH motor insurance industry will see its profits squeezed this year, according to a new report that will raise concerns among investors who bought into recent flotations from industry giants Direct Line and Esure.
The report by Ernst & Young also warns that the effect of new legislation – introduced yesterday – that is designed to cut the number of spurious personal injury claims will be “neutral at best”.
Early analysis of company results by the accountancy firm reveals that in 2012 motor insurers paid out £1.02 in claims and costs for every pound they received in premiums.
This was the industry’s best underwriting performance in five years and was largely thanks to increases in premiums.
But since the end of last year fierce competition has begun to drive down motor premiums again, meaning the industry is expected to struggle in 2013.
“These early results show that the market has turned too soon, well before many players have managed to break even,” said Catherine Barton of Ernst & Young.
“The market has softened before most players have become profitable outside of ancillary income.”
Motor insurers who make a loss on their core business can still produce an overall profit by earning substantial sums from other revenue streams such as investments and referral fees.
However, since yesterday it has been an offence for insurers to receive referral fees from lawyers in personal injury cases, ending a business that helped push up premiums but earned millions of pounds for the industry.
It is hoped that the reforms will reduce the number of such cases and insurers will be able to make up for lost revenue by reducing the total amount they have to pay out in claims.
The motor insurance industry is also facing an Competition Commission probe and is still dealing with an EU ruling that banned the ability to price insurance according to gender.