Motor premiums decline in the UK

A reduction in UK motor insurance premiums is underway as insurers anticipate reforms to curb whiplash claims and reduce lump-sum payments for long-term care costs and lost earnings, according to Fitch Ratings.

Confused.com has reported a 7 percent quarter-on-quarter fall in the average premium quoted through its price comparison website in the first quarter of 2018 and Fitch expects upcoming insurance sales data from the Association of British Insurers to confirm that prices did fall in the first three months of the year. This would follow three years of price rises, driven by rising claims costs and shrinking margins.

Following the UK government’s 2016 proposal to limit whiplash compensation, Fitch expected a fall in claim costs to lead to lower premiums, given the competitive nature of UK motor insurance. Likewise, the government's September 2017 proposal to revise the Ogden discount rate, which would lead to lower lump-sum payments to cover long-term care costs and lost earnings, should also lead to lower premiums. The government hopes the proposed reforms will be in place by April 2019.

The tighter rules on claims assessments and settlements would apply to all claims made or settled after the implementation date, including those from incidents that took place before the rules came into effect. An April 2019 start date would, therefore, have cost - and pricing - implications for policies sold more than a year beforehand and it seems that insurers have started to adjust prices in anticipation, Fitch noted.

The agency expects insurers to gradually reduce premiums further as the new rules become more imminent, and again after they take effect - if there is evidence that claim costs are falling at least in line with expectations. However, Fitch thinks insurers will take a cautious approach to price cuts, given that some of them overestimated the impact of previous attempts to reduce personal injury claims, significantly weakening their underwriting performance.

Fitch does not expect the reforms to have a material impact on insurers' profitability or credit profiles, as pricing adjustments will tend to compensate for changing claim costs, although this may take time while firms wait to see how the rules affect costs.

Fitch’s sector outlook for UK non-life insurers is still negative, reflecting the agency’s expectation that intense competition, claims inflation and increasing use of price comparison websites will continue to put pressure on insurers' earnings for both motor and household cover.

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