Motor insurers endure worst underwriting conditions in a decade

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UK motor insurers suffered their worst underwriting performance in a decade last year as spiralling claims and other costs far exceeded premiums, with further losses expected in 2023 as providers struggle to recoup the expense of inflated payouts.

Car insurers’ net combined ratio, which shows claims and costs as a proportion of premiums, hit 109.5 per cent in 2022, according to the latest figures from consultancy EY. Anything above 100 per cent on this measure, which is adjusted for reinsurance, represents an underwriting loss.

“It’s a long time since it has been this bad,” said Rodney Bonnard, UK insurance leader at EY. “For many people, it is not in recent memory.” 

All parts of the global insurance sector have suffered from inflation in their claims costs but motor insurers have been hit particularly hard as a sharp rise in the cost of second-hand cars, parts and labour eviscerates margins. 

This has shaken up a competitive UK market. FTSE 250 insurer Direct Line’s chief executive Penny James stepped down in January after a string of profit warnings, citing “significant headwinds”. In March, Canada’s Intact announced an exit from the UK personal motor insurance market after inflationary pressures weighed on its UK and Ireland business.

Bonnard described the factors hitting insurers’ margins as an “amalgam effect, all arriving at the same time”, as inflation combined with rising accident rates after a pandemic lull and regulatory pricing changes that made it trickier for companies to force prices higher. 

Annual premiums are now soaring as underwriters try to catch up with cost inflation, putting pressure on consumers. EY warned that it expected prices to rise 16 per cent this year and 11 per cent next as the industry strived to “rebalance its books”.

Based on discussions with insurers on their pricing strategies and other workings, the consultancy thinks that will be enough for UK motor insurers to generate an underwriting profit for 2024, achieving a net combined ratio of 97.4 per cent.

But given the significant rises in prices and costs, it was quite a “narrow runway” for insurers to achieve profitability and there was a significant degree of uncertainty on either side of that forecast, Bonnard said. 

The average annual policy for a UK motorist cost £478 in the first quarter, up 16 per cent from a year earlier to its highest since the end of 2019, according to industry figures. During the pandemic there was a dip in pricing as Covid-19 restrictions dramatically reduced car crashes and claims.

Answering MPs’ questions earlier this month, senior industry executives defended the sharp rebound in premiums, pointing to squeezed profits in the sector and the significant increase in claims costs. Motor repairs are about a third more expensive than they were last year, according to data from the Association of British Insurers.