Companies will be cautious about cutting rates after experience in 2013 reforms


UK motor insurers may be slow to cut rates in response to the government’s latest crackdown on whiplash claims, according to ratings agency Fitch.

In the Autumn Statement on Wednesday, chancellor George Osborne pledged to shave £1bn from the cost of providing motor insurance by ending cash compensation for minor soft tissue injuries and transferring personal injury claims of up to £5,000 to the small claims court.

In return, the government expects insurers to pass on between £40 and £50 a year in savings to motor policyholders through reductions in premium rates.

‘Cautious response’

But Fitch expects insurers to tread carefully after what happened with the 2013 legal reforms, when insurers cut rates sharply in anticipation of lower claims.

Fitch said: “We expect a cautious response after the sector overestimated how much previous reforms would reduce claim levels, hurting their underwriting profitability.”

The ratings agency added that it was uncertain whether the proposals, which need to go through consultation, will achieve the £1bn savings Osborne has promised.

It said: “The last time the government tried to address the rapid growth in personal injury claims, by outlawing claim referral fees and preventing the recovery of success fees, insurers slashed premiums by nearly a quarter in 2012 and 2013.

“The price drops were partly driven by the industry’s over-optimistic forecasts for lower claims and meant the accident-year combined ratio, a measure of claims to premiums, climbed steadily from 103% in 2011 to 112% in 2014.

“This time insurers will probably pass on savings only slowly and as they see evidence that claims are falling.”


Fitch added that insurers may also try to use the reforms to strengthen their “weak profitability” in motor, where the industry has reported accident-year combined ratios above 100% every year for the last decade.

The rating agency also noted that motor results have been propped up by large releases from prior-year reserves.

It said: “We believe this level of reserve releases is unsustainable as stocks of reserves put aside during 2010/11 are being depleted.

“Lower reserve releases in the coming year could lead to a higher 2016 combined ratio for the sector and therefore a bigger underwriting loss.”