COMMENT: UK motor heading for a big crash

COMMENT: UK motor heading for a big crash

A motor insurance seminar organised by Ernst & Young (‘Dodging The Potholes’) grabbed the headlines this week because it revealed that Gibraltar-based insurers have a bigger share of the UK motor market than Lloyd’s. That’s less surprising when you find out that one of the biggest UK motor companies, Admiral, is among several companies that operates out of Gibraltar.

The seminar that generated the press coverage actually had some very interesting presentations examining the numbers behind the market, looking at the phenomenal rise in personal injury claims, for example.

But the results seminar came on the back of a hard hitting report on the UK motor market from E&Y (in conjunction with the CII), ominously entitled, Bringing Profitability Back From The Brink Of Extinction.

The report paints a picture of an industry that is changing shape so fast that its participants are having trouble keeping control of the fundamentals. Importantly, both insurers and distributors are struggling to make a profit as the online aggregators (or price comparison sites), predicted by E&Y to control half the market by 2014, test the traditional industry model.

The £10bn gross written premiums UK motor market is highly concentrated and fiercely competitive, with companies largely dependent on investment income (!) and ancillary sales for profits. The combined ratio has only been better than 100% twice in the last 25 years and in 2010 it languished at 120%. Since the financial crash poured cold water on the investment markets, the sector’s return on capital has crashed down to -43% in 2010.

It isn’t going to get any easier. Insurers responding to the survey agreed that aggregators are bad for business, generating low levels of cross selling and up selling. Tellingly, they also expose weaknesses in insurers’ pricing strategies. Renewal rates for aggregators are also low (as you might expect), compared with other channels.

Respondents also thought that online sales through aggregators exacerbated fraud, with applicants ‘tweaking’ the rating questions to get a lower quote – and are not being picked up by the aggregators.

Overall, Ernst & Young says it uncovered an unhappy picture of insurers and distributors all trying desperately to make a profit. It believes some will not succeed and more will be forced to leave the market.

It says profitability will be enjoyed by the few who can demonstrate a firm grip on the fundamentals of their business through control over their claims costs, operating expenses and acquisition costs and through ‘customer centricity’. But it adds that the aggregators will continue to undermine these efforts.

The report warns that although insurers are hoping to reclaim their direct relationship with the customer, they will soon discover how the aggregators plan to develop into ancillary sales, further eating into the areas where insurers say they want to make greater profits. The aggregators currently control 32% of the UK motor market.

The report also highlights some worrying emerging trends around online sales that could be storing up reputational harm for the business.

A proportion of those surveyed expressed concern over the potential pitfalls of online sales. The first potential issue is the way that the initial prices quoted on websites tend to increase as the sales process continues, cover is adjusted, the excess is reduced and additional features are added. E&Y says it is not unusual for the final price paid to exceed the initial ‘tease’ rate by 30% or more. The Office of Fair Trading reviewed pricing techniques in May 2010 and showed that drip pricing “has the most significant financial loss to the consumer compared to other pricing techniques”. The industry needs to be careful that it isn’t found to be putting the customer at a disadvantage, E&Y says.

The second (related) concern is that the strong focus on price-led marketing can lead to product features being relegated to the small print. Cover marketed as being ‘comprehensive’ is often less complete than customers realise, which may not become clear until a claim is made. Experience has shown that the reputation of an industry is easily damaged by such practices as illustrated by the negative publicity surrounding the banks over PPI.

But perhaps the most chilling warning in the report comes at the end. E&Y predicts that where personal motor has gone, other markets are likely to follow. “We feel it is important to stress that the changes examined by this report are not solely of relevance to companies specialising in retail motor. They are harbingers of change for other product areas in personal and commercial lines, which will in turn have a further impact on the UK insurance industry as a whole,” it says.

It forecasts that the home insurance market will be next to encounter the extremely tough operating environment depicted in the report: “Unless lessons are learned from the way motor insurers have reacted to the advent of aggregators then we will see similarly difficult conditions here. We believe this will be the next profitability battle ground.”

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