UK motor market in a ‘very unattractive position’ – analyst

The UK motor insurance market is about to enter a “very challenging period” and the underwriting cycle is at a “very unattractive position” according to research by Berenberg analyst Sami Taipalus.

He predicted that market-wide profitability will decline “significantly” over the next few years because of sharp cuts to rates, and that the industry-wide combined operating ratio will rise above 115% by 2016.

He also said that telematics would be “no panacea” to the sliding profitability.

Taipalus write in the research report: “We do not expect telematics to provide any material benefits to the earnings of UK motor insurers in the long term.

“Indeed, the technology seems likely to be a requirement of doing business in certain segments of the market, with the benefits from lower claims costs likely to be competed away, in our view.”

The report also noted the regulatory pressures on motor insurers. Taipalus said: “From the outside it often seems as though the UK motor insurance industry is locked in a semi-permanent battle with the regulator and politicians.”

He said Berenberg was particularly concerned about potential new regulation on instalment income and excessive renewal rates.

Rising to the challenge

The report said the listed motor insurers – Direct Line Group, Admiral and esure – are relatively well-placed to meet the challenges, though they will not escape unscathed from the soft market.

It said Admiral would be most affected by price cuts squeezing profit margins, and Direct Line woudl be most affected by any regulatory pressures.

The stockbroker upgraded its rating on esure’s shares to ‘buy’ from ‘hold’ because its shares offer a high yield in the near term.

It maintained its ‘sell’ rating on Admiral and its ‘hold’ rating on Direct Line Group.