Bumpy road ahead for the motor market

Amid growing evidence of falling personal lines motor rates, a split has emerged between companies that are pulling back and those going for growth. Whichever direction they take, keeping costs in check will be the key to profitability in one of the industry’s most
commoditised lines of insurance.

The nine-month results for 2012 revealed a divide in companies’ underwriting approach to personal lines motor. Several are reducing their exposure, including Admiral, AXA, RSA and Zurich.

Admiral caused a stir when it revealed its Q3 UK motor turnover had dropped 5% to £502m from £527m, rendering it flat at £1.5bn for the first nine months. RSA cut its personal lines motor net written premiums by 19% to £326m 2012 to date. It said: “We have continued to push rate and reduce volumes in less attractive sectors.”

By contrast, Aviva said in its nine-month results: “While we have contracted in some competitive areas such as SME commercial, we have continued to grow profitably in personal motor, with net written premiums 8% higher.”

Ernst & Young (E&Y) insurance practice partner Catherine Barton said insurers’ approaches are being driven by their experiences in motor. She said: “Each company has a different footprint in the market and will have its own idea of where it is going. Some businesses have more legacy issues.”

There is also some disagreement about where rates are headed. Several aggregator studies point to significant reductions (see table, right). Some companies have also reported drops. Zurich said the 2% dip in its general insurance gross written premium at the nine-month stage was partly due to falling motor rates.

Market is on a cusp

However, there are also signs at some companies that rates are holding. Aviva reported at the half-year stage that personal lines motor rates were “broadly neutral” and RSA revealed a 1% personal motor rate rise in the first nine months of 2012.

Barton said: “The market is on a cusp. Some aggregators are saying they have single or double-digit percentage point reductions, but other companies are saying rates are holding or there are slight increases.”

When negotiating change in the sector, a key focus will be expense ratios - companies’ running costs as a percentage of net earned premiums and a key component of the combined ratio. Keeping costs down is perhaps more important in motor than any other line. It is largely sold on price and thanks to price comparison sites it is easy for customers to track pricing across providers.

Cost management is also vital for firms cutting their motor portfolios. They need to reduce cost in line with premium reductions or their cost ratios will spike.

Deloitte insurance practice partner Paul Tomlinson contends that it is not always a case of reducing expense ratios, but ensuring that the value from the expenditure is maximised. For example, companies tend to expend much of their cost on acquiring new business. Tomlinson said: “I don’t think there is enough focus on retention.”

Maximising client retention is a benefit because existing customers are less sensitive to price rises than new ones. Tomlinson also feels companies could benefit by analysing data on potential customers, rather than using broad-brush criteria such as gender. “Companies need to shift away from standard questions when signing up new clients,” he said.

A key component of a low-cost model is e-trading. While firms have embraced this, Tomlinson said trading systems are sitting on old policy management systems.

Companies also have to strike a balance between expense and claims ratios.

Scrimping on claims management to keep the cost ratio down could bump up the claims ratio.

Barton said: “Delivering the cost model as effectively as possible is the main differentiator between an insurer that is performing well and one that is performing less well.”