Prices for U.K. motor insurance are falling faster than expected, and insurers are "getting ahead" of planned legislative changes by cutting rates now, Andy Watson, the CEO of Ageas SA/NV's U.K. business, said in an interview.
Ageas' U.K. unit, the group's second-largest nonlife division after its Belgium arm, reported a 14% drop in gross written premium to €352.1 million in the first quarter from €411.8 million in the 2017 first quarter, excluding the company's Tesco Underwriting joint venture with Tesco Bank.
Part of the reason for the drop was U.K. motor prices falling in anticipation of tougher rules on whiplash claims and a change in the way the personal injury discount rate, also known as the Ogden rate, is set, Watson told S&P Global Market Intelligence. Both changes are contained in the Civil Liability Bill, expected to come into full force in 2019, and are expected to cut insurers' claims costs. Insurance CEOs, including Watson, have pledged to pass this benefit on to customers through lower premiums.
Watson said: "The motor market, since the turn of the year, has been softening more than we expected it to. We need to monitor that situation very closely. If it continues to soften, I'm not sure that would be a good thing overall but we would have to respond to that because the top line is the attention point in this set of results."
He added: "I hope the market doesn't continue to fall rapidly. I and a large number of CEOs made a commitment to pass on savings if there is legislative change around whiplash and Ogden. But it seems to me that the market is getting ahead of those changes. The changes haven't taken place yet, and yet rates are coming down."
Ageas U.K.'s premium income is also falling because the company has been exiting unprofitable business to improve underwriting results, Watson said. Ageas U.K., like its parent group, targets a combined ratio of 97%. A combined ratio is a measure of underwriting profitability. A figure below 100% shows an underwriting profit, while above 100% is a loss.
Ageas U.K.'s combined ratio was 100.7% in the first quarter of 2018, having been dragged into loss-making territory by winter storm claims. But the figure was an improvement over the 110% the division reported in the same quarter last year after it was hit by the need to strengthen reserves in anticipation of the cut in the Ogden rate to negative 0.75% from positive 2.5% in March 2017. The Ogden rate determines how much insurers can reduce the payments they make to injured policyholders based on the investment returns the policyholder could make. A negative discount rate means insurers are adding to the claim payment rather than reducing it, greatly increasing their claims costs.
Watson said the underlying combined ratio, excluding weather claims, was 98.5%, and admitted there was "more to do" to hit the target. But he added: "We have made a significant step forward on that route."
Further falls in premium income would make hitting the target more challenging. A combined ratio is claims and expenses expressed as a percentage of net earned premium, so if the premium falls, and claims and costs stay the same, the combined ratio worsens.
Watson said: "It is a balancing act as always between top and bottom line but that is an area we are monitoring very closely." He added that the expense ratio was flat in the first quarter of 2018, showing that the company had cut expenses in line with premium reductions.