Howard Lent finds that the industry is braced for a levelling out of motor premiums

Although always a matter of debate, motor insurance premiums have peaked. That's the view of specialist sports car broker, the Allen & Allen Group. It says that various factors indicate the upper threshold has now been reached and rates have just about plateaued.

It suggests rates are unlikely to drop much in the short term because insurers now have more accurate data on which to base their quotes, and a far greater understanding of risk assessment in each market sector.

Thus, insurers know where their break-even point is, and are unwilling to drop below it, even if this means losing business.

Healthier market

Allen & Allen confidently predicts that the days when a few big insurers could dictate rates and be fairly sure they would not be challenged are over.

Today, with greater competition, customers are bombarded by offers from a plethora of insurers of all sizes, across all forms of media. It is now easy for motorists to keep trying until they are quoted a premium that represents good value.

Tony Allen, chief execuitve of Allen & Allen, says: "Today the market is a lot more healthier. I remember the days when one insurer would put up the rates and everybody else would follow. The way it is now, spread out, with direct, non-direct, and internet trading, has created better pricing."

With many now fighting for the same business, it's not surprising that margins are being cut to the bone.

However, the perception that customers are eagerly searching for the best deal and thereby contributing to lowering premiums may not be entirely accurate. Recent research by the RAC found that women are more happy to stick with existing insurers than men, and that those who do shop around approach only five providers.

At one time the EU Directive on Gender Equality looked as if it could have an impact on premiums, with an enforced equal premium policy meaning upward premium charges for everyone - or at least for those, such as women, who have traditionally been charged lower premiums.

But the impact on premiums is now unlikely, given the watered down EU legislation that emerged, conceding that treating gender and age issues equally could not feasibly be established with one premium charging system.

"That has gone, which is marvellous," says Allen. "It is clearly nonsense to charge the same price for male and female young drivers, especially when the performance of young males is a lot poorer." That is to say, they have more accidents and are therefore costing more via the claims system.

Increased competition

Datamonitor agrees that competitive renewals and innovative pricing deals have added up to cheaper motor insurance premiums.

Its report, UK Motor Insurance 2004/05, states that the way people are buying their motor insurance is beginning to change. The report focuses on the way in which online insurance and the growing number of retailers and supermarkets in the sector has increased competition and pushed prices down.

"Premium rate rises of 20% plus, as seen several years ago, are a thing of the past. Throughout 2004 there was little in the way of upward movement, with the average premium for comprehensive cover around £750," says James Greenwell, financial services analyst at Datamonitor and author of the study.

Supermarkets such as Tesco have stolen market share from traditional insurers by offering no-nonsense cover at competitive prices. Banks and building societies have also tried to muscle in on a market that is worth £9.7bn in the UK alone. However, banks have struggled to emulate the success of retailers and have yet to leave their mark on the car insurance market, with the exception of the Royal Bank of Scotland.

Online quote engines that do the legwork on behalf of the consumer, such as confused.com, have recently seen a rise in popularity. Although seven in every ten policies are sold over the telephone, the internet is rising in prominence, both as a means of selling insurance and as an easier way for consumers to compare prices.

Greenwell adds: "Insurers are currently very keen to hold on to existing customers with competitive renewal quotes, as well as looking to attract new business with a raft of innovative pricing deals."

Litigation impact

But an RAC survey on motor insurance questions the view that motor insurance premium have peaked.

It suggests that the increasing amount of litigation is contributing to rising claims costs.

Phil Manchester, head of processing and product development at RAC Claims Services, says it is no surprise to find the results over the current litigious environment and rising costs of claims. "The interesting part is the number of people who think that number is going to rise."

The survey found that 36% of both brokers and insurers are concerned about the increased amount of legal action, while 63% of brokers said that costs per claim have risen between 10% and 25% in the past five years.

But Allen debates this, arguing that the potential numbers have been factored into the cost/premium scenario. "The industry has done a lot to combat those rushing to make a claim. And everyone knows where they are now with the costs. Things are a lot more stable," he says.

Regulation effect

Could rates yet be pushed upwards? The new FSA regulations may be another factor that could have an impact on overall insurance rates.

One report stated that the regulations would add £3.50 to every policy - a 1% increase on a policy of £350.

Nick Hall, managing director of RAC Insure, says: "With recent regulation affecting the insurance industry, the cost of home and motor insurance policies may increase. But with our research showing that a third of the nation fails to shop around, there is a clear opportunity for people to save money and make the most of the range of insurers - and prices."

As for the big players, Norwich Union remains the clear market leader on a brand basis, but was overtaken by RBS Insurance at a group level following the acquisition of Churchill. This move enhanced RBS's presence across key personal lines, particularly in household, where it now controls over 28% of the market.

Market forecasts

The UK private motor insurance market is forecast to be worth nearly £14bn by 2009. This represents a slower growth rate, as private motor is forecast to exhibit a lesser degree of volatility across the underwriting cycle, according to Research and Market.

But motorists would buy car insurance even if it was not mandatory, according to motorinsurance.co.uk, which found that 98% of the 500 respondents would continue to buy motor policies.

More revealingly, it also found that more than a quarter of people investigate car insurance policies online before reverting to the phone to complete the deal, and 19% buy directly off the internet.

The survey revealed that those who bought insurance online did not always find it a hassle-free experience. Nearly half described the process as "annoying" or "difficult".

On a worrying note: at any one time, one in 20 motorists are driving without insurance - 5% of all motorists, more than one million in total. Accidents involving these motorists cost up to £500m a year.

Could this result in an unexpected push on motor premiums?

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