2018 predictions: Motor insurance “firmly back in the black" - EY

EY UK general insurance leader Tony Sault has predicted that the outlook for motor insurance will improve in 2018, while home insurance will continue to feel the pressure.

Year of the motor insurance industry

According to Sault, prospects for motor have “improved drastically” since the Ministry of Justice published a proposed revised discount rate in September.

Despite a recent Justice Committee report cautioned against raising the rate to over 1%, as this could affect payouts to vulnerable claimants, Sault remains optimistic for the industry.

“While the Justice Committee’s recommendations for the Government a couple of weeks ago on the draft Ogden rate legislation tempered things a little, we still expect the industry to be firmly back in the black next year,” Sault commented.

If the discount rate is revised, Sault expects to see an average fall of 3% on premiums. If the Civil Liability Bill also passes, he predicts a Net Combined Ratio (NCR) of 98.5% and a drop in premiums of another 8-10%.

He points out that, despite other “hurdles” – such as a report looking at how claimants invest the money paid out to them – that the committee wants cleared before a new discount rate comes into effect, the outlook is still good for the industry to recoup some of last year’s heavy losses should the discount rate be set to 1+%.

“We believe the most likely outcome is now for the review to result in approximately £1.5bn reclaimed from last year’s £3.5bn losses, and a likely fall of up to 3% on average premiums, saving up to £14 annually for the average motorist,” Sault continues.

Sault also looks to the possible passing of the Civil Liability Bill as a boon for motor insurers.

He adds: “In addition to the Ogden changes, 2018 could also see the passage of the Civil Liability Bill. This would reduce the costs associated with bodily injury, potentially reducing premiums by an additional 8-10%, totalling a £59 per year saving once both reforms are fully implemented. Given these important changes in legislation, we now expect the motor insurance sector to be facing a far rosier 2018 compared to 2017 and predict a Net Combined Ratio (NCR) of 98.5%.”

Home insurance to feel the “bite”

In contrast, Sault’s predictions for the home insurance market are less rosy. Following an “extremely challenging” 2017, Sault believes that 2018 will be “equally demanding”, whether the UK is affected by severe weather or not.

With a “barely profitable” 99% NCR anticipated for home insurers in 2017 – assuming no extreme weather events occur –, Sault predicts that 2018 will be even worse. He suggests the 2018 NCR will be 101.7%.

Sault points to digital investment as a big challenge for home insurers trying to keep costs down and profits up.

He continues: “Fundamentally, this is an industry in transition where the challenges may last for several years. While there is evidence of the green shoots of new business, traditional players are being challenged by new technology and are having to invest in digital capability in order to keep up.

Rising claims and inflation are also a lethal combination causing trouble for the industry, and they show no signs of letting up as 2018 rears its head.

”These changes have combined to push down premiums while at the same time rising claims and expensive inflation have created a double whammy. Taken together these issues have had a negative impact on profits with more deterioration expected to come,” Sault continues.