UK motor insurance: A model to be rebuilt? – Part 1 Insurance profits despite the disruptive force of Price Comparison Websites


Viewing the UK Private Motor Insurance (PMI) market from a European perspective, there are several indicators that epitomize just how peculiar this market is. This series of articles will highlight the PMI market’s particularities, not as a value judgement on the stakeholders but rather as mere observations; acknowledging the fact that UK retail financial services often differ from the rest of Europe and a simple comparison would not tell the whole story. This first article in a series of three will contrast the disruptive force of Price Comparison Websites (PCWs) with the profit metrics of the UK PMI market. Secondly, we will analyse the particularities on the claims side of the UK PMI market that put customers continuously at a significant financial disadvantage. In a third article, we will argue that the market is bound to change and discuss possible drivers of change as well as how insurance companies can best prepare themselves.

The disruptive force of Price Comparison Websites

In the last 10 years, UK distribution has evolved to a nearly fully digital world (see figure 1), with less than 3% of the population buying its car insurance face to face with agents. The rest purchases their policies online or over the telephone, with the rise of Price Comparison Websites being a major disrupting factor. Interestingly, PCWs have had a far smaller impact in the rest of Europe, with S&P research finding that they account for around two thirds of policies sold in the UK, but less than a tenth elsewhere in Europe.

Figure 1 Motor insurance distribution channels (Sources: FFA – les assurance de biens et de responsabilité, Données clés, 2016, GDV - Statistical Yearbook of German Insurance 2016, ABI- UK Insurance Key Facts 2016)

Given the important role that PCWs now play in many consumers’ purchasing decisions, the CMA has carried out a review of PCWs’ impact. Whilst broadly positive, the report did highlight room for improvement, with many customers unclear on how the sites make money and wrongly believing that they cover the whole market. The CMA is now looking closer at one of the PCWs, specifically considering whether their contracts with insurers actually result in higher prices.

PCWs generally cover a wide range of number of products and services such as financial services, energy and telecoms and are the largest intermediaries for the individual insurance market. Compared to other products or services, insurance has the highest level of churn (37%) and the PCWs have the largest share of intermediation (figure 2).  At this rate of churn, the average insurance client tenure is down from 3.1 years to 1.4 years – so much for customer loyalty!

Figure 2 Yearly churn in selected markets and PCW shares (Source: “Price comparison websites” UK Regulators Network - FCA, Ofcom and Ofgem 2014)

One may wonder if a reason for the high rate of churn, compared to other consumer markets, is linked to the wide range of prices quoted.  Research by Capital Economics has shown that a customer will only receive, on average, two competitive quotes (within 10% of the cheapest) and a multitude of uncompetitive quotes.

It is clear then that the PCWs have disrupted a large share of the PMI market, although it is worth remembering that two of the market leaders, Direct Line and Aviva, do not list on them. As an aside, the PCWs have nearly killed off standalone PMI brokers. Those that remain tend to have a strong legacy business (like Swinton) or a group connection to an underwriter (like Hastings), but the recent spate of private equity investment in the sector suggests that some are still willing to bet on brokers having a profitable future, albeit with potentially different business models.

UK PMI metrics: In the face of a clear picture on distribution, the profit metrics are mind boggling

Despite the widespread use of PCWs to shop around, and the greater competition they are seen as promoting, average premiums in the UK are far above the level in continental Europe – well over double the levels seen in France and Germany (Figure 3)

Figure 3 Average motor insurance premiums (Sources: FFA (Bilan de l’année 2016/ 2017, ABI 2017)

But what about profitability? Seen from afar the Profit and Loss structures of insurers are, in any country, a difficult thing to interpret, given insurance accounting intricacies. At a first glance, the combined operating ratios for the UK motor insurance give the impression that the market is unprofitable, showing a persistent underwriting loss.

Figure 4 UK PMI market combined ratio (Source: ABI 2017)

However, measuring PMI profitability by the combined ratio hides the real profitability of the business. Two additional effects change the perspective dramatically. The first one is caused by distortions from provisioning policies (Figure 5), with substantial provision releases the norm in recent years.

Figure 5 Reserve releases (Source: Insurance Times Top 50 Insurers 2016)

The second effect can be found in the other revenue streams and ancillary products contributions (Figure 6): While generating underwriting losses in their operating result, at the Profit and Loss level, most insurers are profitable. Interestingly, the best performing underwriters are often smaller, more specialised providers.

Figure 6 Profit per customer from underwriting and other services (Sources: Company accounts 2016)

In a nutshell, despite an aggressive pricing stance on PCWs, UK insurers managed to maintain a comparatively high level of premiums. These premiums, however, do not translate into underwriting profits, the operating results from PMI underwriting remain negative. The fact, that UK PMI insurers are still profitable can be partially explained with a certain flexibility around the provisioning via accumulated reserves, offering significant leeway to manage to the desired profit outcome. But there must be another factor influencing those metrics. On the one hand, there must be a cost factor that explains the negative operating results despite comparably higher premiums, and on the other hand there has to be an income factor that explains the other revenue streams which result in overall positive profits per customer. We believe that factor can be found in the claims side of the UK PMI market, an analysis on which we will dedicate our second article in this series.

Bertrand Lavayssière

Partner Office London

Milena Rottensteiner

Senior Consultant Office Frankfurt


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