ILC ARTICLE

Insurers on ‘slow journey’ to recovery

18th October 2023

Claims inflation in the past year has been unsustainable, but price adjustments made by insurers are not expected to kick in until next year at the earliest.

In his keynote address at ILC’s Managing General Agents (MGA) Claims Conference 2023, Alex Evans, CFA Vice President, European Insurance Equities, Citi Research EMEA, said that 2023 would be another difficult year for insurers but predicted that the next 18 months will be ‘a slow journey to improvement.’

However, the industry is rallying from a low base. Alex pointed out that profitability for personal lines is the lowest it’s been for a number of years.

Trading conditions

The main reason for this is because of tough trading conditions in motor insurance, with the market as a whole recording a combined operating ratio (COR) of 109% in 2022. This is due to claims inflation estimated at between 10% and 17%, driven by higher repair costs, longer repair times, and rising labour rates which accelerated even faster from last summer.

Alex said, “Against these rising claims costs, the level of earned premium remained flat.”

The start of 2023 continued in a similar trend, with motor claims inflation stuck at 13%. Meanwhile, repair costs were up 15% in the first quarter of the year and 16% in the second quarter.

However, there are some positive signs. Repair cost inflation is anticipated to slow to eight per cent in the third quarter, with claims inflation down to five per cent for the second half of the year.

Difficult year

But despite this, Alex is still predicting a difficult year for insurers. Although they responded to what he called ‘unsustainable losses’ by raising premiums – Confused.com saw new business quotes in the second quarter increase 40% year-on-year, while the Association of British Insurers reported combined increases of new business and renewals at 21% in quarter two – Alex has warned that their impact will not be felt for 12-18 months.

He said, “I’d characterise the next 18 months as a slow journey to improvement. A lot of pricing increases made this year will not have any impact on profitability in 2023, but we expect material improvements – in the high single digits – in combined ratios in 2024, in motor particularly. While we still expect claims inflation to remain elevated, in mid-single digit territory, we think that normal earned margins should be reached in the second half of 2024.”

Other factors

Other factors that could also impact insurer profitability in the coming year include the Ogden Rate, which is due to be changed at the end of 2024, and Consumer Duty.

Alex warned that Consumer Duty could have a significant impact on pricing as the Financial Conduct Authority has said that ‘pricing in line with the market is not a justification of fair value.’

However, against this, adjustments to the Ogden Rate, which was last set in a low interest rate environment, could lead to a seven to 12% earning uplift for insurers.

Held in association with the MGAA, ILC’s MGA Claims Conference took place on 28 September at 155 Bishopsgate, London and was supported by Headline Sponsor Claims Consortium Group (CCG); Gold Sponsors: Activate Group, Carpenters Group, EDAM Group, Enterprise, LexisNexis Risk Solutions, Pulse, Value Checkers, and Wiser Academy.