UK motor insurers are suffering from over-optimistic beliefs about the benefits of the Legal Aid, Sentencing and Punishment of Offenders (Laspo) reforms, according to research from Towers Watson

The 2013 UK Motor Insurance Report by Towers Watson revealed that the motor insurance market cut underwriting losses in 2012 with a combined operating ratio (COR) of 104.1%, 1.9 percentage points lower than the 106% reported for 2011.

Commercial motor was the biggest contributor to this reduction, with the COR falling to 102.6% from 107.4%. The personal motor COR fell 0.9 percentage points to 104.6%.

However, the report said 2013 had not been a good year for the industry and that a combination of banking the projected benefits of the Laspo reforms too soon, together with continued competitive pressures on pricing and underwriting margins, must inevitably feed into insurers’ results.

This competitive pricing arena has seen personal motor rates fall to their lowest levels for two years according to the latest figures from the Confused Car Insurance Price Index in association with Towers Watson.

Towers Watson UK head of general insurance Karl Murphy said: “Irrespective of COR performance at the mid-year, there is significant agreement that things have been heading in a less favourable direction as 2013 has progressed.

“As some senior industry figures have already pronounced, the industry has to acknowledge it has got some things wrong and take corrective action.”

The report said insurers needed to take action on making risk management more effective for periodic payment orders and make the most of Big Data initiatives such as telematics – which it highlighted as a game changer for the industry.

Towers Watson said this would help improve the underwriting performance of the market and help cut down on expense costs which rose over the year.

Karl Murphy said: “Insurance executives will need to take strong action to steer the industry through this resumption of the downward cycle.

“The current situation could almost be characterised as an internal struggle between a solid underwriting approach and the need for competitive pricing. Clearly, the two are not mutually exclusive, but whichever view prevails will go a long way to determining near-term prospects.”