Insurers make underwriting profit for second year running, but this will be ‘short-lived’

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UK motor insurers made their second consecutive year of underwriting profit in 2014, accounting firm EY said.

But the company warned that the profit will be short-lived and predicted a 105% combined operating ratio for motor insurers in 2015.

It added that insurers have not been able to maintain more than two consecutive years of profit-making in the last 30 years, and before 2013, had not made a profit since 1994.

Worse performance

Motor insurers reported a collective combined operating ratio (COR) of 99.8% in 2014, according to EY’s annual motor insurance results seminar. However, this was 1.3 percentage points worse than 2013’s 98.5%.

EY’s study contrasts with the findings of rival accounting firm Deloitte, which said motor insurers reported a 101% COR in 2014, a one-point improvement over 2013’s 102%.

EY described motor insurers’ 2014 underwriting profit as ’marginal’, as the COR is just 0.2 percentage points away from the 100% break-even mark.

The company added that the result was propped up by reserve releases, which shaved 10.8 percentage points from the COR. This is the second-highest reserve release in the last 30 years.

EY said that for 2015 to be profitable for motor insurers, reserve releases would need to rise to an “unprecedented” 14.7% of net earned premiums. The firm is predicting reserve releases of 10% of net earned premiums in 2015.

EY’s head of retail property and casualty actuarial for the EMEIA region said: “2014 has outperformed market expectations but has only narrowly achieved a profit.

“There will be a considerable number of insurers in today’s market who will not have previously experienced two consecutive years of profit, but if soaring claims trends continue this could be a once-in-a-career high, unless premiums rise considerably.”

She added: “The elephant in the room is the level and rate at which motor insurers are releasing reserves. Between 2010 and 2013, the annual hike in releasing reserves was driven by a small number of insurers, but in 2014 80% of the market improved their results by releases from their reserves.

“This pattern was seen 10 years ago, and led to the industry pushing through record-breaking premium hikes in 2009/10 to shore up their balance sheets. Motor profitability cannot be perpetually propped up by drawing from the coffers and too heavy a reliance on reserves could have real financial repercussions for some players.”

Rate rises

On a more positive note, EY said motor insurance rates are showing the first sign of rising since 2011, with a 2% year-on-year increase in the first quarter of 2015.

In tandem, the forecast for claims inflation in 2015 has dropped very slightly from 4.4% in 2014 to 4.3% in 2015.

Barton said: “It was inevitable that premiums would start to rise, as they had dropped to unsustainably low levels. With insurers fighting an uphill battle for the two-year profitability figures to stretch into three, we expect further rate rises this year.”