OREANDA-NEWS. After three years of steep decline, and more recently, stagnation in UK motor premiums, there seems to be some signs of timid relief on the horizon for motor insurers' technical profitability, says Fitch Ratings.

A continuing rise in motor claims frequency and severity, despite government-led reforms, pushed UK insurers to increase their premiums in 2Q15, according to data from the AA British Insurance Premium Index published this week. The data shows a qoq increase of 5.2% for a typical comprehensive policy.

This is in line with Fitch's expectations. In December 2014, Fitch signalled that the market would stabilise, driven by our expectation that rates in the personal motor market would bottom out due to unsustainable premium levels and diminishing reserve buffers. Our sector outlook report, available by clicking on the link below, provides additional information.

We changed the outlook for the sector to stable from negative in December and the AA's 2Q15 figures support our view. Strong growth in motor premiums is finally correcting a period of inadequate pricing, which has compressed margins in the industry for over 10 years. Overall, Fitch views this as a positive development for the credit quality of UK motor insurers.

We do not, however, see any signs of a return to a hard market. Fierce competition is likely to persist during the rest of 2015, especially from the more agile and higher margin Gibraltar-based insurance companies, such as Admiral and Hastings. These still have the ability to undercut their UK peers, given their lower expense base.

Profitability in the UK non-life sector remains weak overall. Underwriting margins are under pressure due to high fraud and claims costs and are still too thin to generate positive technical results.

The July Budget brought further bad news. Chancellor George Osborne announced that the standard rate of tax paid on insurance premiums would rise to 9.5% from 6% in November. Given that insurers are already operating on very thin margins, any additional costs are highly likely to be passed on to the customer through further premium increases. This has the potential to increase insurance costs for families, potentially weakening demand for household and motor insurance cover.