Is the UK motor insurance model priced to fail?
They're at it again! Yes, UK motor insurance rates are on the decline by an average of 10% across the country according to the most recent analysis by UK Aggregator MoneySupermarket.com.
Will the UK insurance industry ever accept that motor insurance, like any other class of insurance, should be priced based on the underlying risks and claims potential with the simple goal being to produce a balanced and profitable portfolio of risk? This simple economic fact continues to eluded most UK motor insurers or, at best, has been strategically sacrificed for the perceived longer-term benefits arising from a greater market share.
Unfortunately, this long-term strategy only works if the market cycle turns i.e. hardens and this change is maintained over a period of a few years. What happens, of course, is that prices increase for a short period - as has been the case over the past 18 months - but then one or more players break ranks in a grab of market share, the others follow suit to maintain their market share and so the downward pricing spiral begins again.
This 'yo-yo' pricing effect could be seen as normal in an otherwise very competitive market place where pricing is now completely transparent and where motor and home insurance products have become nothing more than commodities with price - not product features - the sole focus of the (unsuspecting) buyer. For this to be the case, insurers would have to be making a profit. As such, the effect of healthy competition must be judged in the context of overall market results. In this respect, UK motor insurers have, until recently, continued to record a combined ratio of 120% (i.e. a loss of 20p on every £1 of premium written). The most recent market analysis suggests that this ratio has now reduced to 107% which, although an improvement, still means that the industry continues to trade at a loss.
Was this (minor) improvement the catalyst for the recent rate reductions? If so, any strategy that seeks to reduce rates at a time when the industry as a whole continues to lose money, will only succeed in further damaging the industry and could ultimately lead to government intervention to change the way motor insurance is funded and administered in the UK into the future.
The UK insurance industry still has time to get it right. Yes, this will mean higher premiums for everyone in the short term but pricing is only one side of the equation in the rehabilitation of an otherwise broken model. The other important element is the UK's claims culture which requires more initiatives to better detect and manage both fraudulent claims and (rising) personal injury awards.
Only when risk is properly priced and an insurance policy is not perceived (by the public) as a 'slush fund' to be accessed as the need arises, will we see a real competitive market for UK motor insurance where price is only one element and the interests of the buyers and sellers are truly aligned.
Here's a thought... maybe profit is not the motive for UK motor insurers? Maybe UK motor insurance is an accepted 'loss-leader' for the major players with target profits being achieved through their commercial insurance product offerings. If so, should we care if pricing is artificially low provided our claims are dealt with efficiently and fairly?