Underwriting profit in motor insurance for the first time since 1994

​1994 was the year when Oasis released their classic Britpop album Definitely Maybe, the Channel Tunnel opened and the average UK house price was just £56,000. It was also the last year that the UK motor insurance sector made an underwriting profit. Until now.

Latest figures from the ABI reveal that last year, the UK motor insurance market received more in premiums than it incurred in claims and expenses for the first time in 22 years.

Welcome though this is, we need a bit of a reality check before we get too carried away. An underwriting profit of £33m might seem like a very large amount of money, but for an industry turning over £14bn in premiums each year, it only represents claims and expenses paid of 0.3% less than premiums written (or what is known in the industry as a Combined Operating Ratio (COR) of 99.7%). Furthermore, the upturn is primarily down to the commercial motor insurance sector turning in a £77m underwriting profit, up on a £9m underwriting loss in 2014.

However, on personal lines it is a different story, with losses going up to £44m in 2015, a £15m increase. This continues a trend that has emerged over the last decade – largely driven by remarkable price competition in personal lines driven by the price comparison websites – of motor underwriting results being worse in personal lines than commercial lines.

​So while a market wide underwriting profit is a rare and exciting event for the analysts and statisticians among us, UK motor, and personal lines in particular, remains a highly competitive environment in which it is difficult to make money.

But making money is, ultimately what needs to happen for any market to be sustainable. How then, have we managed a 22 year wait between profitable years, without the market imploding? The key here lies in the definition of underwriting profit, which represents the difference between the premiums earned and the claims and expenses paid, but crucially does not include investment income. For much of the last two decades, market conditions have provided strong investment returns which have allowed insurers to absorb underwriting losses while still making a profit overall.

In recent years we have entered an era of relatively low economic growth and diminishing investment returns across bond and equity markets in the UK and globally. Many experts expect this not to be a flash in the pan, but a ‘new norm’. This is an era, therefore, in which motor insurers will struggle to justify operating at an underwriting loss, and in that context it’s no surprise to see this coming through in the market figures.

Make no mistake though, UK motor insurance remains extremely competitive, and continues to provide great value to commercial and personal lines customers. Will this continue? Definitely. Will we now see 22 years of underwriting profits? Maybe.

Matt Cullen is Assistant Director, Interim Head of Data and Analytics at the Association of British Insurers (ABI)

article care of the ABI website, original article is here