Companies will push for rate rises because reserve releases can no longer bail them out, says insurer GI boss

Commercial insurers have reached a “tipping point” and will no longer accept weak pricing in the troubled business line, according to LV= general insurance managing director John O’Roarke.

Speaking to Insurance Times after the release of LV=s 2013 results, O’Roarke said that commercial lines needed rate raises of between 7% and 8% to be profitable.

He said: “We probably are at that tipping point where it is getting too painful to continue at the current level. People have relied on reserve releases from prior years to offset the current rate weakness, but I am not sure many commercial insurers have got much surplus reserves left.”

He added that LV= had achieved “mid-single-digit” rate increases on its commercial book in 2013 and is expecting roughly the same this year.

Commercial rates across the market in 2013 were an improvement over 2012 levels, said O’Roarke, but he noted that the resolve to push up rates stalled in the second half of the year because of heavy competition.

He said: “If anyone looks to achieve any kind of rate strength on their in-force book, they run the risk of it being presented to the market as a new business opportunity. That has kept rates suppressed.”

Commercial growth

LV= wrote £201m of commercial gross premium in 2013, up 22.6% on the £164m it wrote in 2012. Within this was a 27% rise in SME gross written premium.

The commercial business, a relatively young book for LV=, is yet to make an underwriting profit. Its 2013 SME combined operating ratio (COR) was 110% and its commercial motor COR was 101.8%.

However, the company is keen to continue expanding the business. The bulk of LV=’s general insurance business is personal motor, but the company is hoping to strengthen both its commercial business and its personal home account.

O’Roarke said: “We are looking wherever we possibly can to counter-balance the motor book. We have just over 3 million private cars insured, so that dominates the portfolio. We are looking to grow home and SME business as a preference to motor over the next two or three years.”

‘Disappointing’ return on capital

LV=’s general insurance profit before tax dropped 29% to £77m after a sharp drop in investment returns offset a tripling of its underwriting profit.

The company’s overall COR improved by 0.8 percentage points to 98.9%.

While admitting that he is “not satisfied” with resulting 10.6% return on capital, down 7.1 points on 2012’s 17.7%, he added: “It was a performance we can be pretty happy with despite a challenging year in the external environment.”