UK private motor insurers must adapt to survive in post-LASPO environment, says Verdict Financial

Danielle Cripps, Analyst for General Insurance at Verdict Financial.

While the last decade has been challenging for the UK private motor insurance market, as regulators and insurers have been fighting to reduce claims costs and pass on rate savings to customers following the introduction of the Legal Aid, Sentencing and Punishment of Offenders Act (LASPO) in April 2013, further obstacles lie ahead, says financial services insight firm Verdict Financial.

The company’s latest report, finds that premiums which fell in anticipation of LASPO’s benefits subsequently rose rapidly over 2015. This was in response to the impact falling rates had on market profitability as a result of claims costs not declining as much as expected. The 3.5 percentage point rise in insurance premium tax to 9.5% also hit hard.

Danielle Cripps, Analyst for General Insurance at Verdict Financial, says: “LASPO and the extension of fixed costs were primarily intended to reduce the expense associated with personal injury claims. It was hoped that the reforms would also lead to a reduction in claims numbers due to incentives for fraudulent and speculative claims being reduced. However, the effectiveness of the legislation has been questionable. While initial benefits were seen, claims management companies (CMCs) and solicitors that profit from processing claims have since adapted to establish compliant business models to continue their practices. The rate of decline of gross claims incurred has been slowing, only falling minimally by 1.9% in 2015 as the market has adjusted.

“Premium rates fell significantly in the build-up to and after the introduction of LASPO in April 2013. High levels of competition intensified rate reductions in anticipation of the benefits to claims costs the new legislation would provide. But with benefits not materializing, the market took a hit in profitability, which it has since propped up with releases of reserves.”

Verdict Financial’s report also states that the UK private motor insurance market is seeing a new wave of tighter legislation to further reduce claims costs, which have begun to stabilize. Reforms aim to disrupt the role CMCs and solicitors play in encouraging personal injury claims, and also to confront the UK’s whiplash epidemic. Whiplash accounts for eight in 10 motor personal injury claims, costs the insurance industry more than £2 billion a year, and adds £90 to the average annual motor insurance premium.

“It is clear that the next few years will be a pivotal time for motor insurers, with new legislation and proposed reforms holding potentially market-changing implications for this sector. However, regulators will have to watch out for CMCs and solicitors finding loopholes in regulation in order to avoid a repeat of LASPO, where anticipated benefits did not fully materialize,” Cripps concludes.