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Categorized | Insurance

Motor insurers struggle for profits

Posted on March 31, 2013

Motor insurers are facing a drop in profitability, despite hopes that a crackdown on Britain’s “compensation culture” taking effect on Monday will stem the growth of personal injury claims.

In 2013, UK insurers are forecast to pay as much as £1.08 in claims and expenses for every pound they earn from premiums – the 19th consecutive year that the industry will have failed to turn an underwriting profit.

    This provisional estimate from Ernst & Young suggests that the long-awaited legal overhaul of injury claims will fail to improve the performance of the motor insurance sector, which has been under scrutiny since the recent stock market launches of Esure and Direct Line.

    Insurers had hoped that the changes to the personal injury legal regime – the biggest in a decade – would reduce the number of spurious whiplash claims, which are widely blamed for pushing up the costs of car insurance.

    But Catherine Barton, E&Y partner, said the effect – while uncertain – was likely to be “neutral at best” and warned that insurers may “have chosen to see the reforms through rose-tinted glasses.”

    The forecast fall in profitability this year comes after the industry enjoyed its best underwriting performance in five years in 2012, when it paid out an estimated £1.02 in claims and expenses overall for every pound in premiums.

    However, this was largely due to sharp increases in premium levels in 2011. Since then, insurers have been cutting prices, partly in anticipation of the legal shake-up. Ernst & Young said profitability in the sector “has already peaked”.

    Under the legal changes, personal injury lawyers and claims management companies will be banned from paying insurers and other parties fees for the contact details of car crash victims.

    The shake-up will mean that insurers lose millions of pounds worth of “referral fees” that they have earned by selling the details of customers involved in accidents that they have not caused, which has been an important part of some companies’ business models.

    However, the industry should receive a boost to underwriting profits from the expected fall in claims costs after the referral fee ban – costs that have been borne by insurers of drivers who cause accidents.

    Legal reforms will also cap the amount that successful claimants pay to personal injury lawyers in “no-win, no-fee” arrangements, which could make such schemes less attractive for solicitors. But claimants are still set to enjoy a 10 per cent increase in damages, resulting in higher costs for insurers.

    Any boost to underwriting income from the referral fee ban could also be limited by plans by some insurers to set up their own law firms. This would allow them to retain profit margins from lucrative personal injury work. Critics have warned questionable claims may continue as a result.