Insurer’s combined ratio drops to 108% as loss improves from £27.8m to £6.7m

Motor insurer Provident took a significant step towards profitability in 2010, having made heavy losses in 2009.

However, the UK motor insurance industry as a whole performed worse in 2010 than 2009, according to accountancy firm Deloitte’s study of insurers’ 2010 FSA returns. And prospects look bleak for profitability in 2011.

Provident made an after-tax loss of £6.7m which, while still a loss, was a significant improvement on the £27.8m loss it made in 2009.

The company’s combined ratio dropped to 108% from 120.5% and claims incurred, net of reinsurance, fell to £134.4m from £164.7m.

The insurer attributed the reduction in losses to the pricing and underwriting actions it took in 2009 and 2010 to address deteriorating loss ratio performance. This in turn was caused by the increasing frequency of bodily injury claims hitting UK motor insurers.

The company expects further improvement in 2011 because its underwriting and pricing actions have yet to take full effect.

Provident has also bought a quota-share reinsurance policy, under which 25% of all business written after 1 April 2010 was ceded to a third-party reinsurer.

However, Deloitte’s figures – presented at the accountant’s annual motor insurance seminar at the end of last week – showed that the motor industry’s combined ratio was 120% in 2010, up from 119% in 2009.

Underwriting losses exceeded £2bn. The 2010 combined ratio comprised a loss ratio of 96% and an expense ratio of 24%.

Furthermore, while this year is likely to be an improvement on the previous year, it is unlikely to mark a return to profitability. Deloitte reported that although there was a lack of consensus at its seminar about 2011 results, the average improvement expected by the 360 market participants was seven percentage points.

Therefore, the earliest the market as a whole can expect to be profitable is 2012.

According to Deloitte, a key reason for motor insurers’ poor performance in 2010 was their collective strengthening of reserves.

The accountancy company described this as the first significant strengthening since the last recession in the early 1990s.

While Provident’s underwriting performance bucked the trend indicated by Deloitte’s study, its investment performance was in keeping with industry-wide trends. Provident’s investment income almost halved to £1.8m from £3.6m.

Deloitte noted that in 2010 investment income did little to alleviate underwriting losses.

Provident’s remedial actions have reduced the number of policies – down 9% to 453,000 on 31 December 2010 from 495,000 at the end of 2009. However, revenues have been boosted by rate increases. Provident’s gross written premium increased 13.7% to £187.9m from £165.3m.

But the effects of the company’s new quota-share reinsurance programme reduced net written premium to £137.9m from £144.8m. Provident ceded £50m of its premium to reinsurers in 2010 compared with £20.5m in 2009.

The results were also helped by a 31% reduction in net operating expenses to £26.4m from £38.1m. Expenses themselves fell to £31m from £38m, and the costs were further offset by £4.6m received from reinsurance commission and profit participation in 2010. This figure was only £456,000 in 2009.

Provident has been part of French mutual insurance group Covea –which also owns Mutuelles du Mans Assurances (MMA) – since June. The sale was completed in April.

Provident is a sister company to MMA’s UK operation, MMA Insurance, and personal lines broker Swinton Group. It continues to be run as a separate operation.

We say …

? Provident’s results, which were in line with the industry average in 2009 and better in 2010, are further evidence that not all motor insurers are created equal – the bodily injury claims storm has been tackled more quickly by some companies than others.

? Rates are continuing to rise in 2011, but insurers will have to look beyond pricing to solve their problems. They can only push up prices so far before they get a consumer backlash.

? While Provident is being run as a distinct entity among Covea’s clutch of UK insurance businesses – it is still very much business as usual at the firm since its purchase – it will be interesting to see what changes are made to the business and its management as the acquisition beds in.