The recovery of underwriting profitability in the UK. motor insurance market suffered a blow in 2003 as improvements in underlying profits stalled, threatening an end to the current hard market.

Despite apparent improvements in the underwriting profitability of the U.K. motor insurance market in 2003, rate increases were not sufficient for it to maintain the underlying results seen in 2002. The results threaten a turn in the market cycle, at a time when its current level of profitability can only be considered 'adequate'.

The headline net combined ratio (a key indicator of underwriting profitability) for UK companies writing motor business - excluding Lloyd's - strengthened slightly to 101% in 2003 from 102% in 2002.

However, the underlying current year combined ratio (which excludes adjustments to prior years' reserves) weakened, rising to 101% in 2003 from 100% in 2002, with claims costs running ahead of premium increases.

The results for comprehensive insurance on private cars saw the first deterioration in the gross claims ratio for five years, rising by two percentage points, despite an increase in the average premium earned per car to £378 from £368. However, the average claims cost increased by 6% from £1,608 to £1,710 and this was only partly offset by a very slight fall in accident frequency.

The second-largest class of business, motor fleet, also saw its gross loss ratio deteriorate five percentage points, from 67% to 72%. For fleet business, premium per vehicle remained virtually unchanged at £695 compared with £692 in 2002, but average claims costs increased by almost 16% to £2,261 from £1,956. It was only a two percentage point reduction in claims frequency to 22% that prevented the deterioration being worse.

The prospect of deteriorating underwriting results is disappointing for the market, which has accumulated underwriting losses of £6.5bn over the past 10 years, and recorded an average combined ratio of 109%.

Standard & Poor's estimates that companies can currently incur a combined ratio of up to 103% and still make an adequate return on capital. But, although results have varied widely across companies, in aggregate the market has only achieved these levels for the past two years and may be hard pressed to achieve this in 2004.

UK insurance companies together wrote gross motor insurance premiums of £11.9bn in 2003, with a further £1.1bn written by Lloyd's syndicates.

- David Laxton is a director of Standard & Poor's

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