With motor rates hardening and the government stepping in to help, could the market finally make some money? Ben Cook reports.

The motor market could finally make a profit in 2009, after 14 years of loss, according to research firm Datamonitor. It forecasts that the market will make a loss again in 2008, but see profits of some £30m in 2009 as premium income is expected to grow at a faster rate than claims costs.

But is it really full steam ahead for motor insurance? Experts say that the wheels are only just starting to turn, and could, once again, go backwards.

Considering how bad 2006 was for the motor market, an improvement last year ­– the nub of Datamonitor’s assessment – was far from surprising. Following some rate hardening in the latter part of 2006, in 2007 the market grew by an estimated 7.8%, fuelled by rate increases across the market of almost 7%. This contrasted bleakly with 2006, which saw a marketwide contraction of 0.9% to £9.3bn, and a loss of £448m, compared to only £85m in 2001 and £232m in 2005.

This decline, according to Datamonitor was the result of competition, which culminated in some players opting to leave the market, most notably Legal & General in June, after the insurer saw its motor book decline from £34m in 2004 to £11.7m in 2006.

“If you look at the market overall, there needs to be a lot more rate strengthening to get into profit.

Barry Smith, Fortis

Datamonitor’s optimism about the motor market prospects is shared by neither insurers or brokers. Despite some important developments that will help brokers squeeze more cash out of the tough market, such as continuous insurance enforcement and the electronic delivery of motor insurance certificates, most motor insurers believe they will still struggle to return a profit.

Barry Smith, chief executive of Fortis, doubts the motor market will make a profit next year. “There needs to be a lot more rate strengthening to get into profit,” he says. Smith adds that, while it is likely that some of the leading players will be in the black, it is very optimistic to suggest that the sector as a whole will report a surplus. He argues that claims inflation, coupled with a net outflow of reserves over the past two years, means that many players will be reporting losses.

Graeme Trudgill, technical and corporate affairs executive at Biba, where he runs the motor committee, also doubts that 2009 will be a year of profit. “There are a few reasons why you’d struggle to see it [profitability] – claims inflation is high, and with comparison sites, you’re getting the rock-bottom price every time,” he says. “I don’t think it [premium income] will outrun claims inflation, so I’m not convinced.”

AA Insurance is also unconvinced. Responding to the Datamonitor report, AA Insurance chief executive Andrew Strong said last month that continuing claims inflation and premium competitiveness made profitability in 2009 unlikely. He added that the cost of claims was showing no signs of slowing. He said: “The cost of damage to property and vehicles is rising by around 5% per year – on top of that we are seeing personal injury claims continuing to increase by 10% per year, as accident victims are more willing to make claims these days.”

“The cost of damage to property and vehicles is rising by around 5 per cent per year – on top of that we are seeing personal injury claims continuing to increase by 10 per cent per year.

Andrew Strong, AA Insurance

AA Insurance predicts that in 2007, for every £100 received in premiums, £112 will be paid out in claims.

And even Datamonitor’s bullish estimates include the caveat that growth in the market to £12.5bn in 2012 will be uneven, and will include a return to loss in 2010. Average growth over the next four years is forecast at a relatively healthy 4.4%, but this is expected to be uneven, which will make smaller players, unable to withstand pronounced shifts in pricing, more vulnerable.

The report also says that the market share of brokers will continue to fall because private motor insurance consumers feel confident in arranging insurance without the help of professional advice.

With two thirds of consumers arranging private motor insurance via the telephone (the bread and butter of market leader, Direct Line) upping market share without losing profit in the sector could prove an insurmountable challenge. Direct Line’s parent company, RBS, in fact controls 31.2% of the market, a figure that has not changed since 2005. The remainder of the top ten insurers, meanwhile, control 41.4%. The rapid growth of internet business could at least provide fleet-footed up-and-comers with a beacon of light.

But there is some good news for brokers, with several new developments that will make life easier and transactions simpler. If they are implemented according to plan, and work as well as hoped, there may be hope for the market yet.

Electronic delivery of motor certificates

It is the electronic delivery of motor certificates that will save brokers the most money. This is the biggest one, no staff printing [certificates] or stuffing envelopes, and no [print] cartridges, Bibas Trudgill says. He adds that the potential savings for brokers as a result of delivering certificates electronically has been estimated at around £11m, but it could be much greater.
Trudgill recounts the story of one broker who contacted him asking when electronic delivery was going to happen, because he said it would save his company £1m on printing and postage.
However, progress on electronic delivery has been slow. In November last year, Jim Fitzpatrick, road safety minister, said he had instructed departmental lawyers to begin drafting the necessary legislation, but there have been no developments since then.
Trudgill adds: The government said it will write the rules, but nothing has happened yet. It is a cheap thing for the government to do, but the Department for Transport (DfT) does not have the resources, though the DfT said it is very high on its to do list.
Carole Nash is one of the brokers monitoring the electronic delivery issue. Simon Jackson, commercial director at the specialist motorcycle broker, says electronic delivery would not only mean a reduction in costs but also a better service for customers. Electronic delivery is on our radar and we are looking closely at the legislation: cost is important, but it is also about a perceived increase in service, he says.