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11

Towers Watson highlight downward profit pressures on motor insurers

Open-access content Thursday 21st November 2013 — updated 5.13pm, Wednesday 29th April 2020

Actuarial firm Towers Watson urged motor insurers to ‘steer’ the industry away from a 2013 profit fall driven by competitive pricing pressures and the impact of legal reforms.

Its annual UK motor insurance industry report, published today, highlighted that after cutting underwriting losses in 2012 the industry is in danger of being dragged back into turbulent waters. Despite the market's improved combined operating ratio (COR) last year, 2013 looks likely to show a return to under-performance in the industry, the report said.

Karl Murphy, Towers Watson's UK head of general insurance, said: 'Insurance executives will need to take strong action to steer the industry through this resumption in the downward cycle.

'The current situation could almost be characterised as an internal struggle between a solid underwriting approach and the need for competitive pricing. Clearly, the two are not mutually exclusive, but whichever view prevails will go a long way to determining near-term prospects.'

The report revealed mixed signals on COR performance so far this year from motor insurers.  Also anecdotal evidence suggested that a combination of banking the projected benefits of Legal Aid, Sentencing and Punishment of Offenders Act 2012 and other legal reforms too soon with continued competitive pressures on pricing and underwriting margins feed into insurers' results. 

Meanwhile, it noted that the average cost of a comprehensive policy dropped by 23% since the end of 2011, fuelled by hefty recent price reductions. 

'Irrespective of COR performance at the mid-year, there is significant agreement that things have been heading in a less favourable direction as 2013 has progressed. As some senior industry figures have already pronounced, the industry has to acknowledge it has got some things wrong and take corrective action,' said Murphy.  

Among the trends the report found an increase of rigour around risk selection. As such, certain companies reported a fall in premium income because they became more selective on the risks they were prepared to write.

Another area identified in the report for future competitive advantage was the use of sourcing and harvesting of external data sets, which found that the majority of the industry is slow to react. 

Also, Towers Watson said analytical capabilities could play a key role in telematics. It believes this could be a potential game changer for motor underwriting and pricing.

Indeed, the report recommended that primary insurers should seek alternative strategies for effective risk management, including dealing with periodical payment orders, which are now being used to settle catastrophic injury claims in the UK. Towers Watson said this pushed the cost of long-term care of serious accident victims onto motor insurers.

The report also included the need for new approaches to maintain historic investment performance. The issue of effective expense management also raised its head as expense ratios rose in 2012.

This article appeared in our November 2013 issue of The Actuary.
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