(The following statement was released by the ratings agency).
LONDON, Aug 28 - Premium rates in the U.K. motor insurance market look to have 'peaked', with most players having failed to reach a sustainable level of profitability, Standard & Poor's Ratings Services said in a market report published today.
"After losing GBP6.7 billion over the past eight years and having failed to make a profit in 2002, time seems to have run out for the U.K.'s motor insurers," said Standard & Poor's credit analyst David Laxton. "With competitive forces taking hold and starting to push premium rates down again, it now looks increasingly unlikely that the market will report a sustained underwriting profit in the near term."
Renewed competition in the market led to a slowdown in rate increases in 2002. With some evidence of a decline in rates during the first half of 2003, the majority of insurers are not now expected to reach a level of profitability sufficient to ensure future profits through a downturn in the cycle.
Gross premiums written in the market grew by only 8.4% to GBP11.6 billion in 2002, representing a steady decline in growth, compared with increases of 11.1% in 2001 and 20.1% in 2000. In line with the slowdown in premium growth, the improvement in the market's combined ratio--a key measure of profitability--was also unremarkable, falling just 1.9 percentage points in 2002 to 102.2% and again failing to make the 100% 'break-even' mark. Although this result was depressed by the cost of strengthening prior-year provisions by some companies, it still contrasts sharply with an 8.9 percentage point improvement in the overall result in 2001 over 2000.
Nevertheless, despite concerns that motor rates have peaked, the profitability of the market is not expected to nosedive as it did in 1995, when the market cycle last turned. Significant consolidation in the sector since 1995 and reduced investment income have increased the scope for the major players to maintain underwriting discipline, even in a negative operating environment. Consequently, as the cycle turns, it is management control that is likely to become the key competency for success.
The top 10 motor insurance groups, representing 82% of the market, reported a collective combined ratio of 101.8% in 2002, broadly reflecting the market average. Nevertheless, the figure hides a significant divergence among the participants, ranging over 29 percentage points. A notable differentiating factor in the results is the companies' expenses. Royal Bank of Scotland Group PLC (RBSG) proved the most profitable group in the market in 2002, with a combined ratio of 89.9% and an expense ratio of 15.8%. This compares with Co-Operative Financial Services Ltd., the least profitable among the top 10, which reported a combined ratio of 118.6% and an expense ratio of 25.5%.
"The impact of a low expense ratio is exemplified by Direct Line, part of RBSG, which reported a combined ratio in 2002 of 74%, almost 20 percentage points better than its nearest rival. It has managed to maintain an extremely low net expense ratio of less than 12% for the past 10 years, and in 2002, even its gross expense ratio was only 10.6%, 11 percentage points better than its nearest major competitor," said Mr. Laxton.
Among policy types, comprehensive cover remains the favorite choice for private vehicles, with the number of comprehensive policies issued up 6% to 17.9 million at the end of December 2002, generating GBP6.5 billion of earned premium income. "Fortunately for motorists, the average cost of obtaining comprehensive cover in 2002 did not increase greatly, averaging GBP362, compared with GBP356 in 2001. Unfortunately for insurers, the average claim increased by 4% to GBP1,589 over the same period," said Mr. Laxton.