UK home and motor markets could go into the red next year

Just when you thought it was safe to expect your motor insurance premiums to continue falling (if they have), EY have made a prediction that it will not last.

Low claims levels have resulted in the UK home and motor insurance markets being profitable this year. However, these business lines will fall into the red in 2022, a report by EY has predicted.

According to EY, UK motor insurers are now expected to achieve an underwriting profit in 2021 with a net combined ratio (NCR) of 97%, based on data from June.

The improved profitability in the June forecast (103.7%) is due to ongoing low claims levels, with Britons’ changed driving patterns persisting. However, the NCR for 2022 is predicted to return to a loss-making 112%, as claims costs are expected to be 25% higher than this year.

Other factors, such as underlying inflation, premium rate falls and costs associated with the FCA’s pricing review are also expected to impact profitability.

Due to COVID-19 lockdowns, car usage patterns across the UK have changed dramatically. Premiums remained relatively stable until the end of 2020, but these have dropped over the course of this year, EY said. The launch of the new whiplash claims process has also impacted premiums, driving a further fall.

EY predicts that consumer motor premiums are set to fall 7% in 2021, making motor insurance £33 per policy cheaper on average compared to 2020. This will make premium rates this year the lowest since 2015.

UK home insurers are expected to be mildly profitable in 2021, with high inflation negating much of the windfall from low claims. The market will then fall into loss-making territory in 2022, EY said.

The market’s 2021 NCR is projected at 99.4%, worse than the previous year (97.6%). The NCR is expected to worsen into a loss-making 101.6% in 2022.

Increased time spent at home due to lockdowns has led to a reduction in theft claims but has resulted in increased accidental damage claims. However, throughout 2021, claims volumes have remained at a relatively low level, albeit higher than last year’s. 2022 claims volumes are expected to return closer to longer-term trends, which were already on a downward path, with structural shifts due to the move to hybrid working. Non-weather claim volumes are forecast to drop marginally 0.6% year on year (2021 to 2022).

“While there are a number of known challenges and opportunities as we look ahead, there is a great deal of uncertainty too,” said Rodney Bonnard, UK insurance leader at EY.

“COVID-19 has had a significant impact on claims patterns and costs over the last eighteen months and while we are expecting some of this to unwind over the coming months as more people return to the office, no one knows if there will be further lockdowns, how hybrid working will settle in, and how much life really will return to the pre-pandemic ‘normal’. There is also uncertainty around how long the high inflation we’re currently seeing will last and how this will play out in claims data during the remainder of 2021 and into 2022.”

“There is certainly a lot for the home and motor insurance industries to contend with and overcome if they are to achieve profitability over the coming years,” Bonnard said.

“Important issues to get on top of increasingly include ESG, which is in the spotlight now amid COP26. Insurers have a vital role to play to counter climate change both internally and as the major players in the flow of green capital.”

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