UK auto insurers ready to underwrite losses due to inflation stings

British auto insurers are expected to take losses this year and next, according to a fresh forecast, as rising inflation changes the fortunes of a sector that has been one of the winners of the pandemic.

Quieter roads continued to force the car insurers Last year, according to data from consulting firm EY, the net combined ratio – claims and expenses in proportion to premiums – was 96.6%. Anything below 100 percent represents underwriting profit. This followed a record 90.3% in 2020.

However, sharper inflation, especially with regard to used car prices, is already pushing up claims costs. Meanwhile, premium rates have fallen during the pandemic. As a result of the contraction, EY forecasts a compound market loss rate of 113.8% this year and 111.1% in 2023.

Insurers were “caught off guard by how bad inflation turned out to be,” said Rodney Bonnar, head of UK insurance at EY. Now, he says, “quite a few headwinds have converged”: the frequency of accidents has risen after a lull in the pandemic and accelerating inflation, just as insurers are responding to a complex pricing reform.

Motor insurer share prices have tumbled this year due to a worsening inflation outlook, with Admiral shares down about 27% and Direct Line about 11%, outpacing the broader fall in UK stocks.

Insurance executives have warned of the threat of inflation in recent months. Direct Line CEO Penny James said in May that premiums not yet “fully accounted for” claims costs are expected to rise during the year, and the insurance company scaled back marketing efforts in the first quarter.

The sector is also agreeing to new pricing rules effective from January that eliminated so-called loyalty penalties for existing customers. The overall effect was raise prices for new businessand lower renewal prices.

But overall, the cost of insurance actually fell 5% from the previous quarter in the first quarter, according to EY data, as insurers navigated the new pricing environment. Earnings will also be affected by the release of reserves, as insurers increase their profits by freeing up money they had previously set aside for pending claims.

Paul De’Ath, head of marketing analytics at consultancy Oxbow Partners, said the key question is how much of this Covid-era “war chest” will be willing to release to support profits. “We have a lot going on at the same time,” De’Ath said.

EY figures suggest that more than usual will be released by 2022, and it is assumed that the frequency of accidents will not return to pre-pandemic levels.