The motor insurance industry will fall back into the red next year, after only one year of profit making, according to research.
EY's biannual UK motor insurance results found that the motor insurance market will end 2014 with a loss-making net combined ratio (NCR) of 108.2%, almost 10% below 2013's profitable results.
Reserve releases would need to reach around 13% for the second time in under a decade, for the industry to achieve a profit in 2014, the research suggests.
A lower reserve release of 5% 2.2% below the release reported in 2013 would achieve an NCR of 108.2%. This would mean a 10% fall in profitability in 2014.
EY predicts that with a similar release of reserves in 2015, alongside a widening gap between premiums and claims costs, underwriters will only achieve an NCR of 112.5%.
Catherine Barton, head of retail property and casualty actuarial, EMEIA, at EY, said: 'Clearly, if the motor insurance market is to be sustainable, it cannot exist in perpetual unprofitability. Something needs to give, which will inevitably translate into price rises for consumers in the short term. However, gradual increases in the price of insurance would protect against an extreme hike when insurers reach breaking point.'
Insurance premiums have dropped 13% over the last two years, but consumers will face a 2% hike in the cost of motor insurance next year, EY predicts.
The forecast for claims inflation this year is 3.1%, but the research estimates that with claims inflation forecast to reach 4.4% rise in 2015, premiums could continue increasing into 2016 and beyond.
Barton said that 2015 might see the start of a trend of rising premiums for consumers.
'The motor market profit in 2013 was nothing more than a hotly anticipated blip, which makes it less surprising that premiums now need to go up.
'However, with claims inflation rising at a faster rate than premiums, a 2% rise won't be enough to begin to curb the industry's long-term unprofitability.'
Barton added that the significant reform recently undergone by the motor industry to control small claims had not impacted with the cost of larger claims, which continues to rise.
'Motor insurers will have no choice but to pass some of this pain onto their customers,' she said.