The short period of profit-making in the motor insurance market has come to an end, according to Ernst & Young’s (EY) annual motor insurance results report.
The advisory firm said the industry had dropped back into the red in 2015 after two years of profitability following the 2013 reforms to the personal injury compensation system.
However, EY predicted there would be a slight improvement in insurers’ net combined ratio (NCR) following recent premium rate increases.
But the company advised that underlying poor performance in 2015 was masked by a 10.8% reserve release, which was the joint second highest in the last 30 years.
EY predicted that in 2016 insurers will achieve an NCR of 100.1%, which represents a year-on-year improvement of 0.4% following on from last year’s rise in premium rates.
However, the firm added that it expected losses will extend, with NCR forecast to decline in 2017, when the government’s planned whiplash reforms will increase pressure to pass on premium reductions to customers.
According to EY, this will in turn hit profitability and the level of reserve releases, currently providing insurers with profits, will dry up.
Tony Sault, UK general insurance market lead at EY, commented: “With the insurance market slipping back into the red – a trend we expect to continue over the next year – discipline around pricing and underwriting will be key to maintaining a favourable NCR in the current climate.
“The reliance on reserve releases, which last year saw something of a surprise jump, now appears to be becoming a norm.
“However, the sustainability of this model is questionable, particularly as the market has reduced rates so aggressively from their recent peak in 2012.”
He continued: “One of the most notable impacts is that we are seeing an increase in market share from some of the Gibraltar-based insurers, which have increased their share of the motor insurance market to almost 20%.
“This increase in competition may lead to a softening market, which will not help insurers looking to post a profit over the coming year.”
EY further estimated that premiums would continue to harden throughout this year, with a 7.9% year-on-year increase and premiums approaching 2012 levels.
However, it stated that premiums were predicted to fall by 6.2% over 2017 as insurers try to anticipate the impact of the whiplash reforms.
As a result of this, EY noted that the forecasted claims inflation in 2016 was a rise of 4.9%, decreasing to 1% in 2017 following the soft tissue injury reforms.
Sault added: “We expect the premium growth to slow through the rest of this year, until it begins to fall as insurers pass on the benefit of soft tissue injury reforms.
“While some may be tempted to retain some of the cost benefit from the anticipated reduction in claims volumes, the continued competitive nature of the market will mean that the majority of insurers will not risk the loss in market share this move might otherwise have heralded.”
He concluded: “So it’s good news for motorists, who may benefit from a £50 reduction in premiums next year, but less good news for the motor insurance market.”