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The Actuary The magazine of the Institute & Faculty of Actuaries

Driving into the headwind

The motor insurance industry has been going through a torrid time, with underwriting losses of a huge scale. According to Watson Wyatt, the true level of losses in 2008 of £1 billion is more than double what has been reported to the Financial Services Authority (FSA) because the insurers used reserves from previous years to offset some of it.

Ryan Warren, senior consultant at Watson Wyatt, said: “These insurers [are” disguising the actual underlying performance of the business. By removing these reserves and allocating them to the year they actually come from, we were able to identify and better understand the true underlying profitability of the market.”

Watson Wyatt expects the industry to be profitable next year — when projected underwriting losses fall from the current 15% of earned premiums to 6% — with a 2% p.a. return on capital, after allowing for investment returns.

However, the firm warns that, despite a likely improvement in profitability, these companies still face significant headwinds including: clients regularly changing insurer or policy often aided by comparison websites, which have increased pricing transparency; an increase in the number of third-party bodily injury claims; the risk that the recessionary environment increases fraudulent claims; the greater likelihood of periodic payments; and the move towards higher excess policies, which reduce average premiums.