The following article from Insurance Times features a contribution from Copart UK’s Managing Director, Jane Pocock, who shares her views on the reasons behind high claims inflation for vehicle damage .
Rates for motor excess of loss policies could rise by as much as a fifth at the 1 January renewal date.
Motor insurers are preparing for large increases to the price of their excess of loss reinsurance cover, with some industry sources telling Insurance Times that they are anticipating rate rises of between 15% and 20%.
PwC general insurance lead Mohammad Khan says these increases are being largely driven by a decrease in the assumptions reinsurers are using to price claims using the Ogden discount rate.
“Most reinsurers priced Ogden at around 1% at the last renewal date, so although the discount rate has increased to 0.25%, for reinsurance pricing it has actually reduced compared to last year,” he says. “That will increase reinsurance pricing, and you are probably looking at between a 15% to 20% increase in the cost of your reinsurance programme.
“If you shop around and negotiate well, and depending on your programme, you might be able to reduce that, but you are looking at a steep increase and that is mainly because you are pricing reinsurance on an Ogden rate of 0.25% compared to 1% last year.”
EY’s Ben Wilson agrees and adds that reinsurers will also be looking at the worsening situation with regards to Ogden and how the rate will be set in the future.
“There is still a bit of catch up from the change in 2017, which has caused big losses for reinsurers,” he says. “The outlook for Ogden is also a little bit worse than it was a year ago, with the new rates being set at a level that is slightly worse than what was expected, and the economic conditions used to set the rates have also deteriorated over the course of the year.
“There is also now a clearer indication from government that they are focusing more on protecting vulnerable claimants, rather than reducing prices for insurers and policyholders, and that will feed into how the Ogden rates are set in the future as well.”
PwC’s Khan says that insurers will also face tightening policy conditions when they come to renew their reinsurance at the beginning of 2020.
“It is not just the quantitative increase in rates that insurers will need to look at,” he says, “it is also the terms and conditions as well. Reinsurers are trying to tighten the definitions, so even if they can’t get the rate through that they wanted, they will effectively get a reduction in expected claims costs through a tightening of the terms and conditions.”
Reinsurance increases feeding through to primary market
Wilson says any increases that do occur at the 1 January renewal date will be forced through to primary insurance pricing due to challenging market conditions and anticipated underwriting losses for the market as a whole in 2019, with EY’s own analysis anticipating a market combined operating ratio of 105.7% for motor insurers.
“These rate increases will have to feed through to the primary market because insurers don’t have the capacity to absorb further increases to their costs,” he says. “The outlook for 2019 is already looking like a big deterioration from previous years, and there is already a lot of reasons for primary rates to increase.
“This will just be another reason for there to be upward pressure on primary insurance rates.”
But Brightside Group chief executive Brendan McCafferty says that, while large reinsurance rate increases are likely for the motor market as a whole, it does not necessarily mean that every insurer will feed those through to the end customer.
“There are strategic options for certain players in the market, about whether they wait [to increase prices] because they have a good starting point on their loss ratio already, which means they don’t have to react immediately, absorb some of that pressure and use that to benefit from volume where everyone else has to put prices up,” he says. “That interplay of starting point economics is quite different and could be great for organisations that have invested in the right data and know-how and have a backlog of data on which they can rely and will be more challenging for everyone else.”
But Khan says overall rates could increase in the primary market if those players currently looking to grow their book of business look to put these reinsurance increases through to their policyholders.
“You already have two or three players in the market who are looking to re-expand their footprint, and they are currently keeping prices down,” he says. “If they start to let increased rates through then we will certainly start to see primary rates increasing again.
“Insurers are already making a loss on new business. If you look at vehicle damage inflation over the last year and a half, that has offset any rate rises that have occurred since the Ogden rate change.”
“That means insurance pricing just hasn’t caught up [with claims inflation],” he adds.
Damage claims inflation also set to hit primary market pricing
High claims inflation for vehicle damage continues to dog the market, with several sources telling Insurance Times that inflation in this area could be running into double figures.
Jane Pocock, UK managing director at salvage specialists Copart, says a lot of this is down to the increased use of technology in modern vehicles.
“All of the gadgets that are used to help with assisted driving are mainly sensors that are fitted around the periphery of the car,” she says. “Once those sensors are damaged, that puts the repair costs through the roof – the periphery of a car is simply becoming a lot more sophisticated.”
Pocock adds that increasing labour rates and skills shortages are also adding to the issue.
“Labour rates are going up, skilled labour is facing a shortage and the number of body shops is decreasing,” she says. “We are also seeing increasing rental costs for replacement vehicles, and the subrogation model for credit hire is also adding to costs.
This, combined with increasing rental periods and estimate creep as a result of bodyshops only uncovering further damage once a vehicle is being dismantled, means that a lot of insurers are finding it more economical to simply total loss a vehicle.”
Help is needed
Brightside’s McCafferty says that the industry needs help with the issues driving all forms of claims inflation and has called on government and lawmakers to act quicker and more decisively when implementing new regulations.
“Insurance is an industry where we have trained our consumers to expect sharp prices, and purchasing decisions are frustratingly often only about price,” he says. “People want to see prices being driven down, and so do policy makers, the government and the media. Against that backdrop, the realities of the economics are really quite troubled [for the UK motor market], and things aren’t being helped by the failure of follow through action from government.
“It took ages to get the Civil Liabilities Bill through, and the action to implement the whiplash reforms is slow to put it mildly. But it is these things that affect prices, and it often ends up impacting those people that need the most help, often young drivers.”
Source: Insurance Times
Categories: Industry News