• Commercial lines more profitable than personal lines in 2005
• Investment returns contribute to £500m profit

The UK insurance market experienced an underwriting loss of £200m across its commercial and personal motor insurance products in 2005, according to analysis presented by Deloitte at its annual motor insurance seminar. The loss was made up of an underwriting profit of £120m for commercial lines and a £320m loss on personal lines.

Deloitte’s analysis of FSA returns found that in 2005 motor insurers had a net operating ratio of 102.3%, which led to an underwriting loss of £200m across the industry.

The £200m in 2005 compares with a loss of £70m in 2004.  A reduction in claim frequency in 2005 helped keep the increase in claims costs to a minimum in a year when the industry’s premium income saw only 2% growth.

At £200m, the loss is much smaller than figures seen in the 1990s. However, this year’s total was buoyed up by reserve releases of nearly £600m from prior year’s claim reserves. £600m is the largest amount ever released by the industry and it had a significant impact on the net operating result this year. The average improvement on the operating ratio from reserve releases was 6.8%, but Deloitte are predicting that this will drop back to 4% in both 2006 and 2007.

Commenting on results, James Rakow, insurance actuary at Deloitte said: “This is the 11th year running that motor insurers have suffered claims and expenses which totalled more than premiums received. It is clear that the white van man is the more profitable risk for motor insurers at the moment with commercial lines significantly outperforming personal lines in 2005.

“This year we have seen the largest ever reserve release and without it underwriting losses would have been substantially higher. The big question on everyone’s mind is whether the market can sustain releases at these levels. We think a more sustainable level is reserve releases of £350m.”

Investment returns
In 2005, once investment returns are taken into account, Deloitte estimates the industry made £500m profit. With an average investment income of around 8% of premium, insurers move from an underwriting loss of £200m to an overall insurance profit of £500m. This is the fifth year in a row that motor insurers have made a profit in the region of 5% of revenue, which now adds up to an estimated industry total of £2.5bn over the period.

Deloitte are predicting claims will outstrip premiums again over the next two years with net operating ratios of 109% for 2006 and 110% for 2007.

James Rakow advises insurers to look at their premium pricing over coming months. “The increases in premiums we have seen so far in 2006 have not kept pace with claim inflation. As operating ratios continue their downhill run, now is the time for motor insurers to test their brakes.”

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Notes to editor
Net Operating Ratio is calculated as (Net Claims + Expenses) / Net Earned Premiums.

About Deloitte
In this press release references to Deloitte are references to Deloitte & Touche LLP which is among the country’s leading professional services firms, providing audit, tax, consulting and corporate finance services. Deloitte & Touche LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu (‘DTT’), a Swiss Verein whose member firms are separate and independent legal entities.  Neither DTT nor any of its member firms has any liability for each other’s omissions.  Services are provided by member firms or their subsidiaries and not by DTT.  Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority.  The information contained in this press release is correct at the time of going to press.