Michael Faulkner says that time will tell over the fortunes of the profitability of the private motor market
The profitability of the private motor market hangs in the balance.
The latest report on the fortunes of the market paints an uncertain picture of its future.
According to Deloitte, the underlying profitability (or lack of it) will deteriorate further this year before improving by the merest fraction in 2008.
The private motor market is already in a loss-making position, the depths of that loss being masked by a pretty hefty reserve release last year.
In 2006, the market’s net operating ratio was 101.4%, but this included a massive (and, as Deloitte brands, “unsustainable”) reserve release of 9.7%.
Without that release, the underlying operating ratio would have been 111.1%. Hardly a shining performance.
The bad news is that the situation is set to get worse, according to Deloitte’s calculations.
This year, private motor insurers are looking at an underlying net operating ratio of 111.6%.
While that only amounts to a 0.5 point deterioration in profitability it is nonetheless significant.
Insurers have been making the long-awaited efforts to push through sustained increases in rates.
There were signs of this towards the end of last year, with Norwich Union boldly announcing double-digit rate hikes, followed by more tentative moves by other insurers.
“The question is: will 2009 see a continued improvement in the marketâ€™s profitability? The answer will be determined to a large extent by what happens to rates in 2008.
The results of these price increases have been seen in the quarterly pricing indices published by the likes of the AA.
According to the AA, average comprehensive motor premiums rose by 4% in the fourth quarter of 2006, before falling slightly in the first quarter of 2007 and then increasing by 2.5% in the second quarter.
The third quarter of this year saw average comprehensive rates increase by 1%.
But the rate hikes must be seen in the context of claims inflation which is running at over 4% a year.
As a result, the increases to date have not been sufficient to halt the further deterioration in the market’s profitability this year.
But if the increases continue, they could start to turn the market around next year.
The question is: will 2009 see a continued improvement in the market’s profitability?
Deloitte says it is too early to tell. The answer will be determined to a large extent by what happens to rates in 2008, particularly in the second half of the year when over a third of 2009’s premium is written.
Insurers are putting through rate increases, but will they be enough?
Only time will tell. .