OREANDA-NEWS. November 30, 2015.  UK motor insurers will probably only cut premiums slowly in response to the government's crackdown on whiplash injury claims, Fitch Ratings says. We expect a cautious response after the sector overestimated how much previous reforms would reduce claim levels, hurting their underwriting profitability.

Whiplash claims in the UK, which cost insurers about GBP2bn a year, are much more frequent than in most other European countries, suggesting that a significant proportion of the claims are fraudulent. The government has promised to address the problem by removing the right to general damages for minor whiplash injuries and cutting legal costs by allowing more cases to go through the cheaper small claims courts. It estimates the changes could save the industry GBP1bn a year, or a drop of GBP40-50 per policy.

However, it is still uncertain whether the proposals, which need to go through a consultation, will actually achieve this level of savings. The last time the government tried to address the rapid growth in personal injury claims, by outlawing claim referral fees and preventing the recovery of success fees, insurers slashed premiums by nearly a quarter in 2012 and 2013. The price drops were partly driven by the industry's over-optimistic forecasts for lower claims and meant the accident year combined ratio, a measure of claims to premiums, climbed steadily from 103% in 2011 to 112% in 2014.

This time insurers will probably pass on savings only slowly and as they see evidence that claims are falling. They may also try to use the reforms to strengthen their weak profitability, although the highly competitive nature of the UK motor insurance market means that most of the cost savings will eventually end up being passed through to customers.

The industry has recorded accident year combined ratios above 100% every year for the last decade and since 2011 motor insurance premiums have fallen significantly, all due to competition. Premiums only began to show signs of a modest recovery earlier this year.

Low premiums have also been supported by extremely high reserve releases, which were equivalent to 12% of the sector's net earned premiums in 2014 and 10% in 2013. We believe this level of reserve releases is unsustainable as stocks of reserves put aside during 2010/11 are being depleted. Lower reserve releases in the coming year could lead to a higher 2016 combined ratio for the sector and therefore a bigger underwriting loss.