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The UK Private Motor Insurance Market - Product Image

The UK Private Motor Insurance Market

  • ID: 2827970
  • January 2014
  • Region: United Kingdom, Great Britain
  • 83 Pages
  • Lake Market Research
Will Falling Claims Costs Result In A Return To Profitability?

FEATURED COMPANIES

  • Acromas (AA, Saga)
  • Amlin
  • Collingwood
  • Liberty Mutual
  • QBE
  • Skyfire = First Central
  • MORE

The introduction of the LAPSO Act 2012 should result in a reduction in the cost and number of personal injury and fraudulent claims. However, significant reductions in policy premiums since the introduction of the LAPSO Act suggests that some insurers are being too optimistic concerning the expected reductions in claims costs and that premium rates are falling too fast and too far.

Remedies proposed by the Competition Commission in its inquiry into the private motor insurance market will, if adopted, result in a significant reduction in claims costs for those insurers experiencing inflated subrogated claims costs, and will result in a fall in profitability for those insurers pursuing a strategy of profiting from referral fees and subrogated claims cost inflation.

Does Telematics offer a solution to underwriting losses?

Telematics-based insurance products present a potential three-fold opportunity of bringing the product development initiative back to insurers and minimising the commoditising effect of the online aggregators, while also providing early adopters with a “first-mover” profit advantage.

While there are indications that telematics-based READ MORE >

Will Falling Claims Costs Result In A Return To Profitability?

FEATURED COMPANIES

  • Acromas (AA, Saga)
  • Amlin
  • Collingwood
  • Liberty Mutual
  • QBE
  • Skyfire = First Central
  • MORE

1. Travel Trends
1.1 Types of Journey
1.2 Car Usage – Weekly Mileage

2. The UK Car Parc 2003-2012
2.1 Age of Cars in Use
2.2 Cars in Use by Propulsion Type
2.3 Cars in Use by Engine Capacity

3. Car Ownership 2003-2012
3.1 Driving Licence Holding
3.2 Driving Test Participation

4. New and Used Car Sales 2003-2012
4.1 Private New Car Registrations
4.2 Used Car Sales
4.3 Car Use

5. The Motor Insurance Market 2003-2012
5.1 Motor Insurance Market Regulation
5.2 General Insurance profitability
5.3 Rise of the Aggregators
5.4 The Motor Insurers
5.5 Private Car Premiums
5.6 Exposure and Claims
5.7 Regulatory Factors

6. The Insurance Consumer
6.1 Insurance Brand Share
6.2 Customer Retention
6.3 Attitudes to Insurance Costs
6.4 Regulation of Motor Insurers
6.5 Treating Customers Fairly
6.6 Distribution Channel Used
6.7 Sources of Information Used
6.8 Use of Price Comparison Websites
6.9 Awareness of and Interest in Telematics Insurance

7. Conclusions and Outlook
7.1 Market Background
7.2 The Motor Insurance Market
7.3 The Insurance Consumer

8. Market Forecast 2013-2018

Data Tables

Consumer Survey Questionnaire

Will Falling Claims Costs Result In A Return To Profitability?

FEATURED COMPANIES

  • Acromas (AA, Saga)
  • Amlin
  • Collingwood
  • Liberty Mutual
  • QBE
  • Skyfire = First Central
  • MORE

Travel Trends & Car Use

- The general trend in travel has been for an overall decline in the number of journeys, particularly car journeys, for both car and van drivers and passengers, and an increase in the number of journeys by rail.
- The number of car journeys turned down sharply in 2006 and 2007 as rising motor fuel prices encouraged motorists to use their cars less. If the current economic recovery strengthens, there is likely to be an increase in both the number and the proportion of journeys made by car, although the growth rate of car travel will be tempered by high motor fuel costs.
- The most car-intensive journeys are for purposes including visiting friends, entertainment, sport and leisure, which together account for 26% of all journeys, of which 71% are by car. Shopping and commuting are the second largest proportion of all journeys and 66% of shopping and commuting journeys are made by car.
- The number of cars in use rose by 9% between 2003-2012 to 28.7 million of which 23.2 million or 81% were privately owned. The average number of cars per household rose by 5% between 2002/03 and 2011/12 to 1.14, due to an increase in the proportion of households with two or more cars.
- While car ownership has increased, the number of car journeys has declined, meaning that car use has fallen. This is reflected in a 3% fall in cars' average annual mileage from a peak of 247 billion miles in 2007 to 240 billion in 2010.

Rising New Car Sales

- Private new car sales began to rise in 2012 and grew faster in 2013 while used car sales remained flat. The growth in demand for private new cars is partly a factor of pent up demand being released following several years of falling sales.
- Rising new car sales are also a factor of greater point-of-sale credit availability with motor finance companies which provide finance secured against the vehicle, financing an increasing proportion of private new car sales via car dealers, particularly on personal contract purchase (PCP) schemes which offer low monthly repayments.
- While sales of electric and hybrid-electric cars account for a very small proportion of new car sales, demand has grown for smaller and more fuel efficient cars as a result of developments in turbo and super-charging technology which has increased the power output of smaller engines without sacrificing fuel economy.

Motor Insurance Market

- Although investment returns have potentially recovered from recent lows, past reliance by insurers on investment returns to offset underwriting losses may not be sustainable as improved investment returns may not be maintained.
- Softening premiums resulting from expectations arising from the introduction of the LAPSO legislation together with intense price competition in essentially a commodity market, will mean that the net combined ratio (NCR) is likely to remain above 100% for the foreseeable future.
- Motor insurers will therefore need to increase profitability by reducing claims costs, expenses and commissions, making improvements to risk control in underwriting, or obtaining additional ancillary income from policy ‘add-ons'.
- One of the issues that the Competition Commission is investigating in the private motor insurance market is any potential harm that might arise from providers' strategies of supplying add-on products and services.
- The Financial Conduct Authority (FCA) has announced a market study into how general insurance add-ons are sold. The FCA's ‘thematic review' of 2012 into the motor legal expenses insurance (MLEI) market observed that it was "hard" to see that the opt-out selling of products as being "consistent with good consumer protection" and concluded that it was a potential example of bad practice.
- The introduction of the LAPSO Act 2012 should result in a reduction in the cost and number of personal injury and fraudulent claims. However, significant reductions in policy premiums since the introduction of the LAPSO Act suggests that some insurers are being too optimistic concerning the expected reductions in claims costs and that premium rates are falling too fast and too far.
- A feature of the private car insurance market since 2006 has been for vehicle exposure to fall in relation to the number of private cars in use. As a proportion of private cars in use, vehicle exposure peaked at 99.9% in 2006 and fell to 90.5% in 2012. This suggests that from 2006, an increasing proportion of private cars in use were uninsured.
- Remedies proposed by the Competition Commission in its inquiry into the private motor insurance market will, if adopted, result in a significant reduction in claims costs for those insurers experiencing inflated subrogated claims costs, and will result in a fall in profitability for those insurers pursuing a strategy of profiting from referral fees and subrogated claims cost inflation.

Telematics Products

- Telematics-based insurance products present a potential three-fold opportunity of bringing the product development initiative back to insurers and minimising the commoditising effect of the online aggregators, while also providing early adopters with a "first-mover" profit advantage.
- There is also a belief or perhaps just a hope that telematics-based insurance products will only attract the ‘good risks' and that the bad risks will be concentrated among insurers that rely upon conventional underwriting methods and that this will increase the underwriting losses of non-telematic insurers and result in an industry shake-out.
- While there are indications that telematics-based insurance products are becoming more popular with 15% of all policies sold on the tiger.co.uk website being telematics-based, the consumer research for this report shows that only 38% of all motorists are interested in telematics insurance products.
- There is also the potential for a societal backlash against motor insurers if telematics adoption results in higher premiums being imposed on a large proportion of motorists or constraints on car use. While the consumer research shows that although 66% of all motorists are aware of ‘black box' insurance devices, of the 38% who are not interested at all in having telematics fitted, 30% regard it as being an invasion of privacy or as being intrusive.
- Some insurers may take little account of a potential societal backlash and may just hold the view that in the compulsory market of motor insurance, consumers will have to ‘lump' higher premiums or forego the use of their cars, especially at times of peak risk. However, the consumer research reported here has shown a desire for more regulation of motor insurers and the Competition Commission may yet act to legislate on the industry.

Brand & Product Failure

- While many motor insurers have worked hard at developing retail brands and sub-brands for their general insurance operations, these have generally failed to engage with the motoring consumer and the purchase of insurance remains largely focused on price. The problem for insurers has been a reluctance or inability to engage with consumers in a meaningful and sincere way and this has been reflected in a lack of product innovation.
- As we move further into the digital marketing era, insurers have a prime opportunity to directly engage with consumers and up-sell a range of more profitable products. Insurers though are failing to think laterally in a marketing sense about the motor insurance consumer by failing to add products such as warranty insurance, car depreciation insurance, MoT insurance and other products that complement their standard insurance products.
- While motor insurers combined have the contact details for almost every car owner in the country, they have failed to develop relationships with those car owners and have also not sufficiently developed relationships with car manufacturers and car dealers to cross-sell car finance and aftermarket insurance products to the new and used car owners they insure.
- It is possible to put a lack of market and product development down to a lack of sophisticated marketing, but one is left to suspect that insurers are more interested in an altogether different aftermarket and that motor insurance is just a means to a larger and more important end - returns on invested premiums.

Treating Customers Fairly But...

- The majority of motorists at 72% overall believe that insurance companies treat them fairly, and superficially, most consumer dissatisfaction would appear to be based purely on the cost of insurance. It may therefore be relatively reassuring that only 24% of motorists surveyed changed their insurer in the previous 12 months at the same time that 20% said their premiums had increased a lot.
- Most consumers accept that fraud and the activities of accident insurance lawyers are the main causes of high premiums, but 17% of motorists also think that the amount of profit insurers make from motor is the main cause of high premiums, and that reducing profits is the second most important thing that insurers should do to reduce premiums.
- This shows that motorists have not bought the "We don't make any profit from motor insurance" message from insurers and is probably one of the causes of the commoditisation of the market, with a focus on price and a willingness to use aggregators or price comparison sites.

A Service Culture Problem

- The opportunity to engage with consumers that the Direct Line ‘revolution' of dealing with customers direct presented in 1985 was largely squandered by the insurance industry, which, much like the financial services sector as a whole, prefers to deal through intermediaries rather than direct with customers.
- The problem for the insurance industry as a whole and the motor insurance business as a sector, is that it lacks a consumer service culture due to the legacy of using intermediary marketing channels. This has contributed to the commoditisation of the market and the rise in the use of aggregators.
- While the priority of insurance companies remains one of using compulsory insurance as a means to raise capital at nil or relatively low cost and maximise the return from invested premiums in the financial markets, insurance companies will always have difficulty in establishing brand credibility and brand leverage to adequately exploit their potential commercial opportunity.

Threat of Regulation

- The fact that 84% of motorists believe that motor insurance should be more tightly regulated by legislation is a warning that the industry should not ignore. In this regard, the remedies proposed by the Competition Commission are pushing at an ‘open door' and are likely to find wide public support.
- Telematics may look like the route to underwriting profitability for motor insurers, but consumer acceptance and take-up of the product cannot be taken for granted, especially if it results in higher premiums for many car users.
- The British public are reliant on their cars and will invest in smaller and more cost-effective cars to ensure that they can keep on motoring in an environment of rising costs. Being told that they will be charged a higher premium for using their cars at times of peak risk may result in a backlash that insurers are unprepared for.

Market Forecast

- Notwithstanding an economic collapse and large increases in premiums, the number of private cars in use is forecast to rise by nearly 4% between 2013 and 2018 from 25.88 million to 26.84 million, but with the number of cars insured (exposure) rising by 10% from 23.55 million to 25.90 million.
- An increase in the number of cars in use should be sustained by rising private new car sales supported by discounted new car finance products. As the economic recovery becomes more deep-rooted, disposable incomes rise, albeit moderately, the proportion of cars that are uninsured will begin to fall from 91.0% in 2013 to 96.5% in 2018.

Will Falling Claims Costs Result In A Return To Profitability?

- AIG Europe (formerly Chartis)
- Acromas (AA, Saga)
- Admiral Group
- Advantage (Hastings)
- Ageas (Tesco, Groupama)
- Aioi Nissay Dowa Ins Co of Europe
- Allianz
- Amlin
- Aviva Group (formerly NU)
- Axa (inc Swiftcover)
- Calpe
- Catlin (incl Insurethebox)
- Chaucer (Hanover Ins Grp)
- Collingwood
- Covéa Group (MMA, Provident)
- Direct Line Group, (Churchill, UKI, NIG)
- Enterprise Insurance Co
- Equity Red Star (Lloyds Syndicate 218)
- Esure
- Haven
- KGM
- LV Group (LV=, Highway)
- Liberty (Lloyds Syndicate 4472)
- Liberty Mutual
- Markerstudy group (inc Zenith, Link)
- NFU Mutual
- Novae Group
- Octagen
- QBE
- RSA (inc More Than)
- Riverstone
- Sabre
- Service Underwriting
- Skyfire = First Central
- Southern Rock (Brightside, eCar, Eldon)
- The Co-operative Insurance
- Tradewise
- Tradex
- USAA
- Zurich

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