Car Insurance

The U.K. motor insurance market has suffered underwriting losses of more than GBP5 billion ($7.8 billion) in just seven years, Standard & Poor’s Ratings Services said in a report published today.

“Having failed to reach ‘breakeven’ or report a profit since 1994, the market is in a difficult situation,” said Standard & Poor’s credit analyst David Laxton. “Investment income earned by the market will have mitigated the underwriting losses in part, but will in no way have covered them, leaving insurers with very significant operating losses.”

With premium growth having halved in 2001, the market is now also faced with the prospect of renewed competition, suggesting that the current insurance cycle is close to peaking.

A brief return to profit by year-end 2002 remains possible, but the market’s long-term profitability looks uncertain. A resurgence of competition will come as something of a relief to motorists, who have seen the cost of their insurance policies rise exponentially in recent years, but threatens to ruin any chance of medium- to long-term profit for insurers.

Heralding the return of competitive forces, premium growth in the U.K. motor insurance market has more than halved, falling to 8% in 2001 from 20% in 2000. “The slower rate of premium increases is symptomatic of the growing competition for profitable business; evidence that has been supported in 2002 by a number of recent advertising campaigns promising motorists lower rates,” said Mr. Laxton.

Nevertheless, rates remain at a high level, with a break-even or better result possible for the first time in the current insurance cycle at year-end 2002, due to positive pricing actions in 2001. “Gross premiums written by the market totaled GBP10.4 billion in 2001, leading to a 10-percentage-point fall in the average combined ratio to 103%, and edging the market closer to the elusive 100% break-even mark,” said Mr. Laxton.

He added, however: “A further significant slowdown in growth during 2002 and 2003 — alongside recent evidence of an increase in claims costs — could reverse even the near-term forecast for profitability.”

Although recent new entrants to the market–such as esure and Egg — have resulted in more insurers vying for market share, it is the top 10 groups that continue to dominate the scene, representing 84% of total gross premiums written in 2001.

Among the top 10, Direct Line has outperformed its peers, reporting a combined ratio of 91% in 2001, a 9% improvement on 2000. Notably, the group is one of only three groups in the top 10 — including Allianz and Fortis — to have reported an underwriting profit. Aviva, meanwhile, remains the largest player in each of the main motor insurance classes; comprehensive, noncomprehensive, and fleet. Of these classes, noncomprehensive insurance saw the strongest premium growth, increasing by 25% to GBP900 million. Fully comprehensive insurance grew by 16% to GBP5.9 billion, and fleet insurance by 3% to GBP1.5 billion.