Insurers will start pricing in savings from the whiplash reforms this year, even though the changes may be delayed until late 2020, new research has predicted.
EY’s annual review of the UK motor sector said this was against the background of “impressive” underwriting profits for the second consecutive year, in large part thanks to the likely increase in the discount rate.
The sector’s net combined ratio (NCR) for 2018 was 94.8%, the best result in 33 years of EY’s records, and a 2% improvement from the previous 12 months. This means that, for every £100 of premiums received, insurers paid out £94.80 in claims and expenses.
This was due to “premium strengthening” in 2017 and the likely increase in the discount rate in August, with insurers releasing reserves ahead of the announcement.
EY said that, excluding the benefit of reserve releases from Ogden, the NCR for 2018 was 98%, slightly worse than in 2017.
But it said prospects for motor insurers over the next two years looked “poorer”, with underwriting losses expected.
EY forecast a NCR of 104.7% in 2019 and 107.6% in 2020, which it said partly reflected continuing high claims inflation and pricing in the anticipated impact of the whiplash reforms.
It explained that the Civil Liability Act should lead to fewer small bodily injury claims, and a reduction in claims pay-outs, but suggested that late 2020 was “a more realistic date for the reforms given likely delays to the new portal project”.
The Ministry of Justice is targeting April 2020, but EY said that “with any large implementation project there is the risk of delay”.
It continued: “Motor insurance pricing is, however, competitive and we expect that insurers will begin to price in anticipated benefit of these reforms ahead of their full implementation.
“We forecast that insurers will be phasing in the anticipated benefits into 2019 and 2020 rates. There is therefore a detrimental impact towards our combined ratio forecasts in 2019 and 2020, ahead of the full implementation.
“While we have not stated a precise figure, some recovery in the 2021 NCR is expected as these benefits are fully realised.”
EY said motor insurers would also face significant challenges this year to address the Financial Conduct Authority’s concerns on pricing practices and co-operate with the upcoming market study following the pricing super-complaint to the Competition and Markets Authority.
In 2018, EY said personal motor insurance cost consumers on average £477, compared to £480 in 2017, reaching a low of £471 during the year. In the first quarter of 2019, this reduced further to £466.
Tony Sault, UK general insurance market lead at EY, said: “The anticipated benefits of the whiplash reforms, together with insurers vying for market share, mean consumer premiums are likely to stay at these lower levels.
“This is welcome news for all car owners. As for insurers, they need to do all they can to shield themselves from the predicted downturn. They need to differentiate their propositions and take advantage of the latest technologies to help drive down costs and improve their customer offerings.”