EY (Ernst & Young) is reporting that UK motor and home insurers expect to make largest annual loss in well over a decade this year, with further losses forecast in 2023.

The firm says that despite a profitable 2021, both motor and home insurers expect to make large losses in 2022 due to inflation increases and premium rate falls. This is all reported in the firm’s newest UK Motor and Home Results Analysis.

Across 2022, Net Combined Ratios (NCR) are forecast to reach 115% in the motor insurance market and 116% for home insurers, which would represent the worst results in well over a decade. Further losses are expected in 2023, with an NCR of 114% predicted for motor insurers and 109% for home insurers.

Further losses expected on both lines of business in 2023, but to a lesser degree as premium rate rises provide some offset to inflation. For consumers, predicted premium rate increases in 2023 on both motor and home policies will add, on average, £66 and £75 respectively to annual insurance spend.

The UK motor insurance market achieved an underwriting profit in 2021 of 97%, largely due to pandemic-related factors, including low levels of commuting resulting in fewer claims. However, the sector is expected to return to the red this year and next.

EY predicts that the NCR for 2022 will be a loss-making 115% – the worst year since 2010 when it was 119% – and 114% in 2023.

Claims costs, which had already been rising over the past couple of years due to pandemic-related supply chain issues, are expected to climb even higher in 2022, as materials, labour and energy price rises feed through into inflation. In addition, premium rates fell by 5% at the start of 2022 following the implementation of the FCA’s pricing reforms, and although rates have subsequently risen over the year to date, this increase has lagged behind inflation.

EY expects average personal motor premiums in 2022 to largely be flat – with only a marginal £1 year-on-year rise forecast. Looking ahead, however, premiums are expected to rise sharply as inflationary pressures feed through into claims costs, leading to a 15% (£66 per policy) increase for 2023.

Rodney Bonnard, UK Insurance Leader at EY, comments: “There are significant challenges on the horizon for motor insurers. While consumer premium rates have risen since the changes to pricing rules earlier this year, they are still well below the level needed to keep pace with inflation. This means that not only is 2022 almost certainly going to be unprofitable, but 2023 is also likely to be loss-making, given the business written this year has been on relatively low rates.”

UK home insurers are forecast to make a significant loss in 2022 of 116% NCR – the lowest level since 2007 when the NCR was 118%. Contributing to what will be the most unprofitable peak in 15 years has been high inflation, a bad year for subsidence following a very dry summer, claims frequencies bouncing back post-pandemic and reduced premiums following the implementation of the FCA’s pricing reforms on 1st January 2022.

2023 is also expected to be loss-making but to a lesser degree, with the expectation of large premium increases next year. While still in the red, the industry is however expected to end 2023 with an improved NCR of 109% despite high forecasted inflation continuing well into the year ahead.

The recent dry summer is likely to lead to higher subsidence claims in the second half of 2022 and into 2023, with an expected increase of 69% in 2022 year-on-year.

The implementation of the FCA’s pricing reforms – which requires firms to charge renewing customers the same as new customers – has resulted in premium rate falls, with the first two quarters of 2022 seeing average premiums drop 5% and 7% respectively compared to the previous year. Whilst new business premiums increased, this was not enough to offset the reduction in renewal premiums.

EY predicts premiums will increase by 6% by the end of this year. And in 2023, they are forecast to rise by 30%, adding £75 to an average policy – in total, average policies would have risen £103 since the end of 2021.

Rodney Bonnard continues: “The recent hot and dry summer, followed by flooding is a clear sign that extreme weather is now more of a reality. UK households are having to deal with both subsidence and flooding within the same year, which is having big implications across the home insurance market. As we move into colder weather, the challenges continue, exacerbated by the energy cost crisis which is likely to lead to more homes being less heated this winter, which could result in freezing pipes and a subsequent rise in damage and repair costs.

He added: “Looking to the future, home insurers will need to consider how UK homes are changing and reflect this in their underwriting and pricing practices. The increasing prevalence of modular building for instance, which uses non-traditional materials and constructions methods, is likely to have new insurance implications. Home insurers will also need to consider how they move towards Net Zero Underwriting, given that UK homes are responsible for nearly a quarter of all the nation’s carbon emissions. New technology is making homes “smarter”, and this provides exciting opportunities for home insurers to engage with their customers and offer new protection solutions.”

He went on:: “Both home and motor insurance industries are certainly facing considerable challenges – as well as opportunities – and will need to review and reshape their operating models if they are to achieve profitability over the coming years. Inflation is an ongoing problem in the current macroeconomic environment, and is likely to be for some time, and insurers will need to manage this, while grappling with other crucial issues such as digital transformation and ESG, if they are to remain competitive.”