Pandemic Set To Push UK Motor Insurers Back Into Profit

By Lucia Osborne-Crowley
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Law360, London (June 25, 2020, 12:54 PM BST) -- The nationwide lockdown brought in to deal with the coronavirus pandemic has pushed car insurers back into profit as claims slump and major regulatory reforms that were due to hit the sector are delayed, audit company Ernst & Young has said.

EY said Wednesday that Britain's motor insurance sector was unprofitable in 2019 because of low premium rates and an increase in the number and value of claims. But that is expected to change in 2020 as the lockdown has taken drivers off the road and caused claims numbers to tumble.

"For motor insurers, the lockdown has resulted in fewer cars on the road, meaning fewer accidents and fewer claims," Tony Sault, head of the U.K. general insurance market at EY, said. "So it is unsurprising that this will be reflected positively in insurers' annual results — but this is an anomaly, not the start of a new trend."

EY also said that the COVID-19 outbreak has pushed back two significant regulatory moves for the sector.

The so-called whiplash reforms — rules that will alter the way claimants seek damages for minor traffic injuries such as so-called whiplash damage to the neck in a car crash — will no longer be introduced later this year and have been pushed back to April 2021.

The reforms are likely to "reduce both legal costs associated with whiplash claims and overall levels of compensation, resulting in cost savings for consumers in the form of lower premiums," EY said.

The Financial Conduct Authority's general insurance pricing practices market study, which is likely to bring significant change to pricing models, has also been pushed back because of the pandemic, EY said. Both reforms are likely to reduce premiums and benefit drivers, the consultancy said.

"This will be helpful for car owners, especially at this financially challenging time," Rodney Bonnard, U.K. insurance leader at EY, said. "However, with the market softening rapidly and the fair pricing regulation likely to cause considerable disruption when it lands, the sector is facing increasing pressure."

Sault warned that the industry's boost from lockdown is masking underlying troubles and that insurers are likely to dip back into the red when drivers get back on the road.

"The current challenge is to strike the right balance between short-term discounts and premium refunds with longer-term fairer-pricing models, while taking the opportunity to build up struggling reserves to shield against ongoing uncertainty," he said.

Sault also warned that the positive impact of lockdown for motor insurers will only go so far in offsetting the widespread losses to other lines of insurance caused by the pandemic. 

The study found that premium rates will drop overall in 2020 compared to 2019, with an average reduction of £20 ($25) per policy, due to worsening economic conditions.

Regulators have pushed car insurers to compensate drivers for their inability to use roads during lockdown. German insurance giant Allianz said in April it will hand back €9 million ($10 million) to its Irish car insurance customers to reflect the drop in traffic amid the COVID-19 crisis. 

As the lockdown eases and drivers get back behind the wheel, regulators have also warned about the potential spike in so-called crash-for-cash insurance scams by fraudsters looking to take advantage of nervous drivers who have taken a few months off the road. 

--Editing by Ed Harris.

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