UK Motor Insurers Struggle to Find Profitable Strategies

Motor insurance market conditions in the United Kingdom and Europe are so difficult that many insurers in the business will have trouble gaining profitability unless a new business model can be developed.

Consultancy Towers Watson noted the cost of injury claims in the U.K. motor market has been rising about 30% annually in recent years. Competitive pressure and low investment returns add to the misery, leaving insurers "in urgent need of finding a new competitive edge," according to Towers Watson.

Ryan Warren, who leads Towers Watson's pricing and product management practice across Europe, the Middle East and Africa, said the U.K. market has changed over the past 10 or so years in terms of the way insurers compete.

"Just 10 years ago, motor insurers could compete successfully just by having proper distribution channels and the right business model, through which they could turn out a small profit," he said.

But over the past 10 years, consumer preferences have changed, in part due to the information provided by aggregator websites. "The segments that motor insurers relied on in the past are slowly disappearing," said Warren in an interview.

A.M. Best Co. noted in a special report on the U.K. nonlife insurance market that motor insurers had a "particularly difficult" year in 2009. "Accident-year performance, which had been poor for some time, deteriorated further," the report said (Best's Special Reports, Sept. 27, 2010).

"Claims inflation has been apparent in accident year results for a number of years," said A.M. Best. "It was only when prior year redundancies appeared to have been exhausted, however, that insurers reflected the higher exposure in the pricing."

With consumers turning to aggregators for price comparisons, motor insurers who once found niche markets to operate in profitably are now "finding themselves open across the whole market," according to Warren.

Motor insurers now have to set up a business model that either aims for "differentiation on service" or lowest cost, "but you can't do both," said Warren.

Claims Inflation

Since the merger of Towers Perrin with Watson Wyatt at the end of 2009, Towers Watson now advises about 70% of the insurers in the U.K. motor market, said George Maher, a senior consultant with the consultancy.

From that vantage point, Maher said Towers Watson has been observing the steady rise in claims costs in the U.K. motor market, which now has a combined ratio of around 120. "That is very problematic for a number of players," he said.

About 30 points have been added to the market's loss ratio -- in excess of inflation -- over the past decade because of "super-normal" increases in claims costs, said Maher.

"The market has been good at implementing rate increases to take into account inflationary pressures," said Maher. But the additional 30 points above inflation is "an extremely striking change, which we've seen in very few markets."

What is even more striking is that this claims inflation has taken place in a market where the actual amount of injuries is decreasing, said Maher. The number of minor casualties in the U.K. motor market is down 30%, the number of serious casualties is down 44% and the number of hospital admissions is down 8% over the same 10 years, he said.

Almost all of the increase in the market's loss ratio is accounted for by an increase in fraudulent claims, said Maher.

Warren added that the distinction between what he calls "hard" and "soft" fraud is important in this scenario. Hard fraud involves intentional acts such as crashing a car into another to generate a claim. Soft fraud involves individuals who consider a claim after an accident has occurred that in the past they might not have, often with the encouragement of newly aggressive lawyers.

According to Maher, soft fraud claims are harder for insurers to target because they typically involve injuries that are "not manifest," and offer no trace of intent to defraud, such as a fraud criminal ring.

There are also instances where a claims management company or car repair shop will provide the details of an accident and anyone involved to a lawyer for a referral fee. "You might not have actually been injured, but the lawyer will encourage you to put in a claim for, say, a whiplash-type injury," said Warren.

Many insurers and claims adjusters in the U.K. market are reporting a rise in the number of solicitors [lawyers] who are aggressively pursuing motor insurance claims, even small claims, he said.

"Some people have become very smart at this game, in a way in which U.S. attorneys have been for quite some time," said Maher. A second factor is the economic slump of the past few years, which Maher said has driven some people to seek "more inventive ways" to derive an income.

According to Maher, there is an "extraordinary variation" in the kinds of responses from motor insurers to the rise in claims costs. For some companies, the impact of claims inflation has been minimal. For others, there is an over-emphasis on underwriting and neglect of claims strategies, he said.

The differences in approach to claims handling is "one of the main differentiators between the winners and losers," said Maher.

Insurers are looking at various solutions to combat claims inflation, including building databases and sharing information to try to pinpoint possible fraud patterns, for example by identifying individuals who make frequent claims. Warren said such efforts are more effective against hard fraud cases than soft fraud.

"It comes down to how companies want to compete," he said of claims strategies. "Those that want to compete on a service basis might be more lenient on claims. They want to attract new policyholders and be seen to be trusted. But that would lead to higher prices."

Insurers competing purely on price and cost would have to take a "harder line" on claims, he added.

What Towers Watson has found through its deep involvement in the U.K. motor market is what differentiates more successful insurers from the less successful is where the claims manager stands with regard to the chief executive. "Where that manager has the ear of the CEO, you see a great difference in the claims statistics," said Maher.

For some insurers, the claims department has become "under-valued," and the company is paying for it, said Maher.

Market Structure

Maher and Warren don't see a particular advantage of any one business structure over others in the motor market. A small insurer writing only motor can be as successful as a large insurer with multiple revenue streams if the underwriting and claims handling are adequate.

Some U.K. motor insurers have been seeking markets outside their home base in an effort to diversify their earning sources. Admiral Group plc, for instance, recently opened shop in the United States and is planning a launch in France.

Admiral's three-year-old operation in Germany, however, has been the subject of speculation that it is about to close down due to heavy losses.

"In response to recent press speculation Admiral Group plc confirms that it is currently considering a number of options in respect of AdmiralDirekt.de, our start-up car insurance operation in Germany, any outcome will be announced as is relevant," the insurer said in a statement, adding that some information appearing in European media was "false" and "the numbers reported are outdated."

The insurer said AdmiralDirekt.de "continues its business as usual," while the group "remains focused on continuing the profitable growth of U.K. operations and on building profitable, growing, sustainable businesses in its international operations."

In a special report in the European nonlife market, A.M. Best said it expects Germany "to remain driven by intense price competition." The report added that strong pricing competition is eroding premium levels, and loss experience this year is likely to be compounded by severe winter weather early in the year (Best's Special Reports, Sept. 27, 2010).

The structure of the U.K. market has changed over the past decade, even as the players have remained mostly the same. Insurers have changed their market share positions as they "jostled" for advantage, said Warren. In some cases, those market share shifts have had an impact on profitability, and some of the larger insurers have cut back on underwriting volume in response.

Other motor markets in Europe are facing similar claims problems as the United Kingdom, but "nothing quite so severe as we're seeing here," said Maher.

One unique element of the U.K. market that is driving price competition is the influence of the Internet aggregators. "One thing that other European markets should not do is to copy the United Kingdom in terms of its involvement with aggregators, because it has cost the insurance industry enormously in terms of the unnecessary competitiveness," said Maher. "It [the aggregator model] has been completely unsuccessful in the U.S. It would be helpful for everyone if it would stay that way."

Warren added that the aggregators have encouraged greater price competition while not showing much profitability themselves, and channeled revenue to advertisers in the process.

The U.K. motor market is now in a situation similar to the airline industry, where competition is making profitability elusive, said Warren. The situation will not likely improve until some consolidation occurs or someone comes up with a new, more effective business model.

Warren said motor insurers may look to carve out niche markets where the aggregators don't have the influence they now have in the mainstream market.

(By David Pilla, international editor, BestWeek: [email protected])