AA price index is uncomfortable reading for insurers

AA Insurance’s premium index for the fourth quarter of 2012 confirms what many had suspected – motor rates continued to fall, meaning they were on the decline for the bulk of last year.

The broker’s latest quarterly index shows that the average motor premium for comprehensive cover fell 2.9% to £789. This followed a 2.9% slump in the third quarter.

The AA pointed out that there were wild fluctuations within this average. For example, the EU Gender Directive has started to influence prices.

But for insurers, which look at prices across their portfolios, the average is important and meaningful.

The effect of rising bodily injury claims

The price rises follow two years of concerted hardening to combat the trend of rising bodily injury claims. The 2012 dip is a welcome respite for motorists, but will make uncomfortable reading for insurance chief executives.

The problem is that bodily injury claims continue to rise, and the uncertainty surrounding the final bill for severe bodily injury claims remains, particularly those settled using periodic payment orders.

Despite the industry’s best efforts to combat fraud, individuals and gangs continue to inflate claims and fake accidents. Today’s tough economic environment is only spurring on these activities.

Insurers are hoping that the legal reforms contained in the forthcoming Legal Aid, Sentencing and Punishment of Offenders Act will curb claims farming and cap the rising claims trend. It is unclear whether it will have the desired effect, however.

Coupled with this, reinsurance costs for UK motor insurers shot up in the 1 January 2013 renewals, even where no claims had been made. Reinsurance is one of the biggest expenses insurers have.

Falling premiums combined with rising costs and claims numbers can only mean one thing for combined operating ratios; UK personal motor insurance has made consistent underwriting losses in recent years, according to annual studies of insurers’ FSA returns.

All indications are that this loss-making trend will continue.