UK insurers are hearing the crashes loud and clear

London

Are drivers who text behind the wheel causing more crashes? Irresponsible mobile phone use is among the more speculative theories insurance executives have put forward in recent days to explain a surge in UK car accident claims to about £ £12 billion (Dh69.17 billion) a year.

Other reasons include cheaper petrol, which encourages driving, and medical advances, which inflate treatment costs. Even more expensive in-car gizmos such as parking sensors and heated windscreens can put up the cost of repairs.

Insurers have tried to fight back against the rising bill by making policies more expensive, ending a long-running price war. Average premiums have edged up about £20 to £600 in the past year, according to Towers Watson, the professional services company. But competition is so fierce that the industry has failed to push up quotes by enough to compensate for the payout spike.

As a result, after two years of just about breaking even, the motor insurance sector is forecast to post underwriting losses in 2015. For every 1 pound taken in premiums, insurers will lose 5p on claims and other expenses, forecasts Catherine Barton, partner at Ernst & Young.

Recently published half-year accounts suggest some insurers are coping better than others. Shares in Esure, which has about 2 million policyholders, dropped 10 per cent after it disclosed last week that claims inflation was running at more than twice the rate of price rises. In contrast, its larger rival Admiral appeared to brush aside the problem to hold profits steady.

“Everyone is facing a similar environment,” says Gary Hoffman, chief executive of Goldman Sachs-backed Hastings Insurance. “The results season shows who is managing it well.”

Ministers have tried to stymie the rise in claims by capping fees paid to solicitors, restricting “claims management” companies that bombard accident victims with text messages, and setting up panels of independent doctors to scrutinise injuries.

But while the measures initially reduced compensation demands for less serious injuries such as whiplash, the latest data point to a resurgence.

Almost 82,000 small claims were submitted last month, 11 per cent more than a year ago. “Actually, they [the reforms] have done little — if anything — to stem that compensation culture,” says Clare Lunn, claims manager at Liverpool Victoria.

David Stevens, chief operating officer of FTSE 100-listed Admiral, adds: “Some of the extreme behaviour before the reforms has fallen away, but lawyers have adapted to make an acceptable living.”

Some insurers who slashed premium prices in the belief that the government’s efforts to curb Britain’s supposed “compensation culture” would reduce accident costs have been caught out.

Their diverging fortunes reflect the different risks each insurer has taken on, says Alan Devlin, an analyst at Barclays. He explains that Admiral is less exposed to relatively minor injury claims than Esure, as the former covers younger, riskier motorists, who are seen as more likely to have serious crashes than car park prangs.

Admiral said that while small claims were indeed on the rise, fewer large demands had been received in recent months.

“Esure is the opposite,” says Devlin. “Because it writes more conservative business, their claims tend to be smaller — and this is where the biggest rise has been.”

Different investor expectations also explain the share price moves. When Esure floated two years ago, it was pitched as a nimble, low-cost operator primed to win market share. Its investors are particularly disappointed by the payouts surge, since it means the company needs to rein in its expansion ambitions to safeguard profitability.

FTSE 100-listed Direct Line similarly says it will take a “disciplined approach” in a “highly competitive” market. Yet its shareholders seem more sanguine.

“Direct Line is more about cost cutting and stabilising its market share,” adds Devlin. “They told a similar message to Esure on claims, but the stock held up a lot better.” Releases from prior year reserves further complicate the picture.

Unfortunately for the industry, the problem shows few signs of abating. Claims management companies are still “out of control” despite the government reforms, Hoffman says. Barton of EY forecasts the industry’s total claims bill will increase by about 5 per cent in each of the next two years.

— Financial Times