The UK auto insurance crisis

UK auto insurance prices are soaring. Premiums for a young single man (the highest out there) are £2,457 (US$3,900), up 47% from a year earlier, Insurance Times reports. (h/t InsuranceNote on twitter)

The Institute of Faculty and Actuaries point to claims management companies. These sound a lot like the public adjusters I wrote about last week, though they also sell bundles of potential claimants to personal injury lawyers, the Guardian reports.

So frequency (the number of claims) is increasing by 10% a year, the actuaries estimate, while severity (the size of the claim) is rising 20% a year. That means rates should be rising roughly by the product of the two, or about 30% a year. [To the math-shy: the calculation looks like this: (1+10%)*(1+20%)-1.0 = 32%, which I round to 30%.]

A lot of that goes to legal costs. The Association of British Insurers told the Guardian that for every £1 of indemnity costs, 40% goes to legal costs. In the U.S., the comparable number is 20%, according to A.M. Best data.

The result: high premiums for customers and weak results for insurers. The actuaries put the industry auto combined ratio at 120%.

That looks like a money-loser to me. In recent years, a 100% combined brought a decent return in the U.S., as the investment income on the premiums awaiting payment (the float) generated adequate returns, though today’s prevailing low bond yields is driving that down to the low to mid-90s.

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