Driven to distraction

News that insurer Legal & General (L&G) has closed its motor book is further evidence of the frequently insurmountable barriers to achieving profitability in the private car sector.

After reviewing its general insurance operation, L&G decided to stop writing new policies and pass renewals onto Equity, concentrating instead on its household and private medical insurance business. It said it did not have the scale to succeed and was not prepared to invest to turn the business around. The account will be worth around £20m at the time of withdrawal.

Meanwhile, MMA has also recently announced its intention to pull away from the private motor sector to focus on its household and commercial books. It blamed competitive pressures in the motor market for its decision.

Is this trend set to continue? Will more insurers looks to shift gear and move away from the notoriously unprofitable sector?

John Castagno, managing director, direct broking, at Equity, thinks not, saying that L&G's decision to close its book was a one-off.

"It was a non-core product line for L&G. To be profitable you need scale, processes and claims management expertise, and even then the market is competitive."

He states Equity has bucked the market's loss-making trend - it has made an underwriting profit for the past 35 years - because of its size combined with careful risk selection.

But, while he would welcome more business from insurers, he believes more brokers than insurers will be looking to offload motor.

Outsourcing company Outright echoes this, saying it is experiencing increased demand from brokers wanting to throw in the motor insurance towel. Chief executive Andy Lee says: "The amount of contact has increased in the last six months. It is largely motor, although some also want to stop dealing with household business."

He says brokers who remain in the sector need to find more efficient ways of doing business, adding that a large outsourcing operation, like Outright, can often take on a book of thousands of policies with a handful of staff.

"This is possible if you have document imaging and can eliminate paper files and the time wasting linked to looking for records."

Motor insurance brokers without volume are earning peanuts from motor policies. A £400-£500 policy will typically only earn the intermediary between £32 and £50.

Mike Powell, a researcher for analyst Defaqto says: "Commission is being squeezed, plus there is the cost of being regulated - and brokers are often forced to charge adjustment fees to their customers for matters such as change of address or vehicle and adding on extra drivers."

He adds that direct writers often do not charge these adjustment fees and may in future use this to attack brokers' market share.

Powell says he was not surprised by L&G's move. "It's tough for brokers, but insurers are struggling too with rising claims costs and increased regulatory costs as a result of the FSA's Treating Customers Fairly initiative.

"They need to have the systems in place so they can formally document procedures to ensure customers receive correct policy wordings and information prior to purchase."

He says one of the biggest pressures on insurers is to ensure they effectively reach customers online. "One of the biggest shifts in recent years is that Joe Public is now willing to buy cover over the internet."

He says this further helps the big brands. It may also allow insurers such as Swiftcover, which has relatively few staff and low outgoings, to secure profits, if the company can build a brand. Powell says one of the biggest success stories in motor has been Tesco, which has around 1.4 million policyholders.

According to Defaqto, in 1992, brokers held around 70% of the motor market, but by 2005, this had dropped to around 40%, with numbers continuing to decline.

Powell predicts in a few years' time, brokers who deal in motor are likely to focus predominantly on niche areas. "It will be high performance cars, people with convictions or young drivers. It's almost impossible to find a quote for an American car on the web, for example, and it is in these areas that brokers will have to specialise."

Selling motor cover using streamlined processes and cutting out the broker was the brainchild behind Direct Line. But, as L&G discovered, it is far from being a sure-fire formula and the direct writers are increasingly looking to diversify.

Broker-only insurers are also showing they don't want all their eggs in the motor basket. MMA has reduced its private motor account from around 60% of its overall portfolio in 2001 to just 42% in 2005 and expects that figure to fall below 40% by the end of the year.

Andrew Goldby, motor underwriting director for Groupama, says: "Many players currently operate at an underwriting loss in motor. But with reserves of a sufficient size an insurer can make money by way of investment return. But this is a strategy with not a little risk."

Although some are keen to write off brokers, their long-standing resilience should prevail. But, it remains clear that for all players this is not going to be an easy ride. IT

Motoring into unprofitability

2010 - The year when the private motor market will make a profit, according to Defaqto. It argued that competitive pressures would keep rates from increasing in line with claims inflation

1994 - The last year the private motor market made a profit

£10.7bn - Claims bill facing motor insurers in 2010, up from £8.3bn in 2005, according to Defaqto

108% - The predicted combined operating ratio of the private motor market in 2006, according to Deloitte. The firm says the market's COR will be 104% in 2005.