Motor insurance model needs to change Towers Watson

Motor insurance model needs to change Towers Watson ;Conditions in the UK and European motor insurance market are so difficult that many insurers will have trouble gaining profitability unless a new business model can be developed.

Consultancy Towers Watson has noted the cost of injury claims in the UK motor market has been rising about 30% annually in recent years. Competitive pressure and low investment returns add to the misery, leaving insurers "in urgent need of finding a new competitive edge," it said.

Ryan Warren, head of Towers Watson's pricing and product management practice across Europe, the Middle East and Africa, said the UK market has changed over the past decade in terms of the way insurers compete.

"Just 10 years ago, motor insurers could compete successfully just by having proper distribution channels and the right business model, through which they could turn out a small profit," he said.

But over the past 10 years, consumer preferences have changed, in part due to the information provided by aggregator websites. "The segments that motor insurers relied on in the past are slowly disappearing," said Mr Warren.

With consumers turning to aggregators for price comparisons, motor insurers who once found niche markets to operate in profitably are now "finding themselves open across the whole market," according to Mr Warren.

Motor insurers now have to set up a business model that either aims for "differentiation on service" or lowest cost, "but you can't do both," he said.

Since the merger of Towers Perrin with Watson Wyatt at the end of 2009, Towers Watson now advises about 70% of the insurers in the UK motor market, said George Maher, a senior consultant with the consultancy. From that vantage point, Mr Maher said Towers Watson has been observing the steady rise in claims costs in the UK motor market, which now has a combined ratio of around 120%.

"That is very problematic for a number of players," he said. "But how much of this is collision and how much collusion? Towers Watson research indicates that a lot of the additional premium cost comes from fraud and estimates that on average about £80 of every insurance premium goes to pay fraudulent claims.

About 30 points have been added to the market's loss ratio - in excess of inflation - over the past decade because of major increases in claims costs, said Mr Maher. "The market has been good at implementing rate increases to take into account inflationary pressures," said he said.

"But the additional 30 points above inflation is an extremely striking change, which we've seen in very few markets."
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