Incredibly Car Insurance companies in the UK are struggling to make a profit and 2010 is likely to see a large reduction in the supply of car insurance, with many famous brands and suppliers predicted to disappear from the high street and our television screens as the market adjusts to cater for the massive losses, according to analysts from car insurance comparison website Car-Insurance.tv.
Recently released figures show that the UK Motor Insurance market has been consistently losing money since 2004 when the total UK profit from underwriting car insurance policies was £77 million.
In 2007 the UK car insurance market made a £1.1 billion underwriting loss, last year the loss was £1.3 billion and the figures for 2009 are expected to be worse……..
Very few car insurance providers have escaped the losses and are profitable, whilst many have released claims reserves held from previous profitable years to disguise the ‘actual ‘ loss.
So what is causing such massive losses in a large compulsory market that not so long ago was the most aggressive in the world?
On the face of it the answer appears to be simple …… The Cost of Claims!
Claims are the problem not because the Car Insurance Companies have failed to include the rising costs of claims into their pricing structures; but because they have failed to cover the true costs in the retail price!
Car Insurance underwriters seem to have forgotten the basic rules of betting when setting their prices – and that is, that the Bookie never loses…….
To understand where the car insurance underwriting companies have gone wrong you first need to examine how they arrive at the price of a car insurance policy premium.
The cost of your car insurance premium is basically made up of three components:
1. The costs of production – Staff, Systems, Distribution etc
2. The costs of losses – known claims ratios ( the proportion of a policy premium pool that gets eaten up in claims)
The cost of all these components can be calculated by clever people called actuaries who work for the insurance companies and the rates set accordingly.
So what’s gone wrong?
Well naturally it is obvious to first look at claims as the cause of the losses – but the truth is far from this end of the life of a car insurance policy……
The frequency of claims has either fallen or remained fairly constant over the period of losses and the actual cost of claims has only risen by 1 percent.
Despite all the noise made about gangs of car insurance claims fraudsters roaming the streets of the UK, the fact of the matter is that most of this is propaganda aimed at deterring fraud which naturally rises during a recession/depression. The number of fraud cases are really insignificant in the true scale of the market to affect pricing.
Admittedly there has been a significant increase in the number of personal injury related claims, egged on by claims farming companies, which would affect long term pricing, however the losses experienced by Car Insurance companies are nothing to do with claims and claims pricing.
These type of claims fluctuations have always been dealt with successfully in the past by car insurance companies by adjusting reserve ratios or negotiating better re-insurance ( laying the risk off), or more importantly by adjusting price ……..
But this time something is different….
Car Insurance Companies can no longer set the price! Not if they want to win the business anyway!
And they certainly cannot sell policies at the premium levels that the Actuaries suggest!
Why? Seemple …….The Internet!
And more importantly Car Insurance Price Comparison websites or aggregators as they are known in the industry, which account for around 90 percent of the Car Insurance sold online. Since around 2004 it has been possible to easily compare car insurance quotes online from numerous suppliers, and invariably the cheapest premium wins the business.
Car Insurance companies not longer set their own prices. And this is the problem!
In a race to achieve enough volume to make a book of car insurance business profitable the car insurance companies have been selling their car insurance polices too cheap and covering their losses with their claims reserves……..time is running out!