Commercial lines more profitable than personal lines
Investment returns contribute to £600m profit

Deloitte’s analysis of FSA returns has found that in 2006 motor insurers had a net operating ratio of 101.4%, the sixth year of clear operating profit. However, the headline results mask a significant downturn in underlying operating performance, as insurers released more than £800m from their reserves to offset poor underwriting experience.

In total the UK insurance market experienced an underwriting loss of £120m across its commercial and personal motor insurance products, according to analysis presented by Deloitte at its annual motor insurance seminar. The £120m loss compares to £200m in 2005 and £70m in 2004. The loss is blamed on low premium growth (1.3%) and high claim costs. 

The total loss was made up of an underwriting profit of £180m for commercial lines and a £300m loss on personal lines. Deloitte’s analysis shows that the personal market has been consistently less competitive than the commercial market for the last several years.

Insurers made record reserve releases of £800m from prior year’s claim reserves to shore up the losses. The reserve release this year follows releases of nearly £600m last year, which was a record in itself. Reserve releases have had a significant impact on the net operating result this year.

Without the benefit of these reserve releases the pure year reported result for 2006 would have been 111.2% - which would have been a loss to the motor insurance market as a whole.

Commenting on results, Catherine Barton, insurance partner at Deloitte said: “This is the 12th consecutive year that motor insurers have suffered claims and expenses which totalled more than premiums received. Reserve reserves have helped to prop up an underwriting loss in the last few years, and without them, the market operating ratio would have been poor.

“The degree to which companies will be able to maintain these levels of release going forward is unclear. What is clear is that the releases seen over the last couple of years are not sustainable in the long-term. We think a more sustainable level is reserve releases of £350m.”

“The continued stronghold of the broker in the commercial space means that the pricing pressures present in the personal market are not yet hitting the commercial motor market. While the white van man is currently the more profitable risk for motor insurers, it will be interesting to see whether this performance differential is maintained as the distribution of commercial motor insurance swings towards direct and bank-based distribution.”

Investment Returns
In 2006, once investment returns are taken into account, Deloitte estimates the industry made £600m profit. With an average investment income of around 9% of premium, insurers move from an underwriting loss of £120m to an overall insurance profit of £600m.

Catherine Barton predicts a slightly stronger result from insurers in 2007 following a series of premium increases since the beginning of the year. Comprehensive motor insurance premiums have risen 4.6% on average, while third party insurance has increased 10%. She expects net operating ratios of 108% for 2007 and 107% for 2008.

She said: “2007 has seen the first sustained period of premium increases since Deloitte’s Quarterly Motor Report’s Premium Index began. The increases in premiums we have seen so far in 2007 will go some way to offset claim inflation.

“Over the next twelve months we expect to see premium rates continuing to rise, particularly for comprehensive insurance where the price increases which insurers have put through so far have failed to match the cost inflation which has been experienced by insurers in recent years.”

Ends

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.  For further information, visit our website at www.deloitte.co.uk