Is stupidity the new underwriting mantra...?
Stupidity is often defined as repeating the same action and expecting a different outcome. With the latest quarterly fall in both UK motor and home insurance rates, I am convinced that the UK insurance market is just plain stupid.
The latest AA Insurance index for UK personal lines, covering Q2 2013, reported further falls in both motor and home rates. Fully comprehensive motor rates were down by c7% in Q2 resulting in a fall over the year of c16%, with third party rates down by c11% and c21% respectively. According to the AA, this represented the largest quarterly fall reported and the 6th successive quarterly reduction recorded.
The news on the household front was also gloomy for the UK household insurers with the AA Insurance reporting Q2 falls of c3% and c5% in buildings and contents cover respectively, resulting in reductions of c2% and c7% respectively over the year.
Of course, high motor and home insurance rates are never popular especially in political circles and so we are certain that there is a combination of competitive and political factors at play here. What is also certain is that this latest (and largest) fall is not a consequence of a falling claims experience. As a result, we view this fall as negative for the major UK personal motor players leading to continuing and unsustainable losses in the sector.
While lower premiums may seem to be a desirable outcome for all policyholders, it cannot come at any price. A dysfunctional personal insurance market is in no-one's interest. If insurers continue to lose money in this sector there will, in the first instance, be a further decline in service levels - especially in the area of claims - which is not good news for the policyholder. Worse case scenario, many insurers will withdraw from the market altogether leading to a massive rate correction by those that remain.
Equally, declining premiums may seem a popular development for the politicians as it is one less contentious issue that they have to deal with. However, with lower premiums comes lower premium tax revenues putting increased pressure on other areas of taxation.
The continuing decline in personal insurance rates is surely a precursor to the overall demise of the personal insurance industry itself. At some point this pricing stupidity has to stop or be stopped. We have recently seen the need for government intervention on flood coverage in the home insurance market. Is nationalisation of motor insurance next?