The UK private motor insurance market could finally make a profit in 2009 after 14 years of unprofitability. A new report forecast that the UK private motor insurance market will make a loss this year but move into a profit of approximately £30million in 2009 as premium income will grow at a faster rate than claims costs. 2009 could be a historic year for the private motor insurance market, putting an end to a painful 14 consecutive years of losses. However, Datamonitor’s forecast sees the market move quickly back into a loss in 2010 as competition intensifies.

The UK private motor insurance market has been chronically unprofitable for underwriters over the last 14 years. The reasons for this are twofold: high claims inflation that has driven up overall costs and competitive pricing by insurers to gain market share. Insurers, especially since 2001, have priced their policies more with an eye towards maintaining or gaining market share and less with regard to their increasing claims bill. The result has been a market that has lost millions of pounds each year for insurers as their costs have outstripped revenue, even when premium rates have increased.

The reason for the perpetual losses in motor insurance up to now is down to a classic catch-22 situation. While insurers have needed to raise their prices, they’ve been unable to do so due to the level of competition between insurers and the fact that the vast majority of consumers buy on price.

Consumers’ number one criteria when choosing a motor insurance policy remained price in 2007. In fact, consumers of all ages and incomes cited price as the top reason for purchasing their motor insurance policy. This trait is particularly pronounced among consumers purchasing online - the fastest growing segment of the market. Consumers that purchased their policy online were the most price sensitive, with 85% basing their choice on price. Consequently, raising premium rates is difficult for insurers concerned about market share, though it may be necessary to reduce their underwriting losses.

Claims costs have typically increased faster than premium income over the last five years, increasing insurers’ underwriting losses since 2001. These costs have increased due to higher average claim costs, despite improved road safety and falling motor accident numbers.