New entrants to motor trade insurance are undercutting established insurers to gain a foothold in what has become a lucrative market. Michael Faulkner reports
Car dealers - who would trust them? Well, a growing number of insurers do. Over the past months, insurers, ever on the look out for the next profitable niche, have been flocking to this previously sleepy sector of the insurance market, attracted by the good profits of those already there.And this new interest is causing quite a stir among insurers long-established in the market. Fearing a price war, these insurers are busy differentiating their products.The focus of this activity is the market for small motor traders. Typically one-man-band operations, they do not have premises and need insurance only to cover the vehicles on the road - "road risk only", according to the jargon.Chaucer, Link, Corinthian and, in Northern Ireland, Wren have launched themselves into this sector in recent months. Frustrated by the unprofitability of private motor insurance, they are eager to reap the rewards that established insurers such as MMA and Tradex have seen in past years. Paul Salter, motor trade underwriter at Chaucer, which entered the market seven months ago, says: "It's a good market to be in, in terms of the cycle. There are limited players and there is a growing trend to be a small motor trader."Over the past few years, rates have been rising steadily and insurers have been making good profits. But all this could come to and end if the fears of some in the market are realised. Insurers are concerned that the arrival of the new entrants will herald the dawn of a deflationary rating cycle. Fingers point to the actions of a few insurers, notably Corinthian and Wren, whom they accuse of aggressive, unsustainable price competition in order to build market share. In Northern Ireland, Wren and Corinthian are charging 25% less than the rest of the market, according to one broker. The concern is that the pricing policies of a few insurers will drag the rest of the market down into an unsustainable pricing spiral. Paul Inskip, managing director of motor trade specialist Fyfe Group, says: "Market prices are being depressed by the new entrants. It must come to end; the rates which they are charging cannot make money."Inskip says that the group is trying to avoid reducing its rates in response to the new competition, but he admits that it is not easy in the current climate. "We are losing on price to other people. You can't avoid competing on price if others are doing it."MMA claims to be holding its rates. MMA motor account manager Anthony Lewis says: "So far there haven't been price reductions, but it is a fear for us."
Contracting marketThese deflationary pressures could be further increased if, as some argue, the market is contracting. A number of brokers and insurers say that, instead of being a vibrant market, the small motor trade sector is in fact stagnating. They suggest that the burden placed on motor traders by the motor insurers database (MID) is forcing many out of business. The MID requires motor traders to notify any changes to their vehicles in their control within 14 days. Thus, each time they get a vehicle, or sell a vehicle they have to make a notification. Lewis says: "Motor traders have many vehicles coming into and out of their possession, but they are not set up to be able to deal with the notifications. We are seeing quite a lot of policies lapsing at renewal as companies have ceased to trade."If this trend continues then the growing number of insurers will be chasing a diminishing pot of business - and the temptation to cut rates will prove even stronger. The established insurers have responded to the new entrants. The Fyfe Group is developing a new motor trade proposition, Monthly Motor Trade Insurance. This will offer online motor trade policies direct to customers that are renewable on a monthly basis. MMA has enhanced its product to incorporate increased commissions and premium discounts. Customers will now be able to make a claim without losing the whole of their no claims discount. The choice of excesses has been increased, and commission has been raised to 12.5%. The increased competition may not necessarily be as good a thing for brokers as it may appear on first glance. Granted, increased competition means potentially greater choice for brokers and keener pricing - according to Salter there has not been anything new in the market for a while.But if the market begins to soften as a result, then brokers will find their commission incomes falling. Furthermore, not all brokers will benefit from the increased choice and even risk losing business as a result. A number of the new entrants are distributing their products through a restricted agency base - for instance, Link has only one agent, Compucar, and Chaucer is using a panel of 12 brokers. The limited panels means that many brokers will be unable to take advantage of the new products on offer. And they may also find themselves unable to compete with the brokers who are on the panels of the aggressively pricing insurers, losing clients as a result.
Burning outIn addition, there are also concerns about the longevity of some of the new entrants. David Belgian, director of broker Northern Counties, says: "Undercutting and buying in volume is not the best thing to do. You have to worry that the new entrants will pick up business that other companies have purged over the past few years."Alan Sayer, director of Northern Ireland broker G&H Bell says: "It is not sustainable to price so low. They are coming in without any understanding of the market, hoping to make a quick profit. In the past, insurers have tried this and failed. I would not be surprised if they pulled out again in six months."Chaucer is quick to defend its entry into the market. Salter says: "We are not buying in volume at unsustainable rates - our product is competitively priced. We are writing at a level where we can sustain profits."Link also denies that it would engage in price competition to build market share. Wren and Corinthian were unavailable to comment when Insurance Times went to press.
What is a motor trader? A motor trader can be described as anyone whose business is buying, selling or servicing vehicles. This encompasses everything from big retail chains with large premises to small one-man operations selling cars from a backyard. The rising popularity of becoming a small motor trader can be seen from magazines such as Car Mechanic. It recently produced a supplement explaining the ins and outs of become a 'home trader' - someone who is a motor trader from the comfort of his own home. There are also increasing numbers of one-man operators who, while they may not appear to be motor traders, need motor trade policies to help them do their jobs. For example, vehicle air conditioning specialists need to be able to drive the cars they are servicing.