"Mild" motor insurance cycle

[td290]

In chapter 13, the Course Notes state that

For classes such as motor business where the barrier to entry is high and technical pricing is used more prevalently, the cyclical effect tends to be milder.

I’m not very close to this kind of business as I’m more involved in commercial lines but I thought the press had been full of stories recently about motor rates hardening having had several years in which the motor insurance industry suffered heavy losses. Isn’t this evidence of a profound cyclical effect? Didn’t it happen for a lot of the reasons set out in the Course Notes?

P.S. Before anyone says anything about claims fraud and referral fees, it is in theory at least possible to allow for these when setting premiums. The cyclical effect was manifest in the fact that, for several years, rates did not seem to respond to either of these two factors.

 

[Katherine Young]

Hi td290,

Due to the very competitive nature of motor insurance, you don't tend to see the big swings in profit/loss over time. It is generally very price-sensitive with low levels of customer loyalty and so rates are monitored and adjusted continuously.

This means that changes in rates tend to be small and often, rather than infrequent big jumps.

(Mind you, I'm not sure whether this actually does result in a milder insurance cycle though!)

As an aside, the Profession has deleted this sentence for the 2013 version of the Course Notes. So I wouldn't worry about it too much!

Kind regards,

Katherine.

 

[td290]

Thanks

Hi Katherine,

Thanks for this. Good to know I'm not on a completely different planet on this one!