The UK private motor insurance market has returned to profit but falling rates could plunge it straight back into deficit, according to research carried out by Milliman UK.
The actuarial and management consultancy warns, however, that there were worrying signs of falling prices that could plunge the market back into deficit, if not checked.
The findings, published in a paper entitled Driving for Profit - Review 2003, are based on a detailed analysis of insurers' financial returns to the Financial Services Authority and its predecessor regulatory bodies.
Milliman UK senior consultant Derek Newton said: "While insurers have shown increased skills in managing their costs, the main driver for the return to profits has been the strong growth of premium rates.
"But prices are starting to fall in real terms, possibly in absolute terms, and, if this is allowed to continue, the market will drop back into deficit.
"This would be bad news for both insurers and consumers as losses would destroy capital and prompt more capital to leave the market. As a result capacity would be reduced in the short term, provoking more closures and mergers and ultimately contracting consumer choice."
Newton added: "This pessimistic vision does not have to become reality. The market is buoyant. If the big players exercise strong leadership and focus on the long-term health of the market, rather than on short-term wins, the industry has a positive future.
"It is important that the market avoids swinging back to a cycle of uneconomic pricing. Otherwise it will throw away the success it has worked so hard to gain, at the very moment of achievement."
