A choppy voyage UK Motor Insurance Industry Report

Transcription

1 A choppy voyage 213 UK Motor Insurance Industry Report

2 Radar Live A new era in real-time pricing delivery has arrived Radar Live builds on Towers Watson s established and market-leading analytical pricing software to deliver sophisticated, fast and agile point-of-sale real time pricing. From traditional rating to state-of-the-art individual policy price optimisation, pricing and underwriting rules developed in the wider Radar analytical environment can now be effortlessly and accurately deployed into the market. The software is easily integrated with existing IT infrastructure and quotation/administration systems, and can serve aggregator, direct and intermediated channels. This means that one holistic environment now supports the production of powerful pricing MI, fast and effective predictive modelling, customisable and effective decision support, price optimisation design and calibration, and actual deployment of rating rules. Radar Live brings enhanced profitability through pricing sophistication, speed to market and agility of pricing decisions, accuracy of rate deployment, and operational efficiency. The software harnesses the full potential opened up by data enrichment and insurerhosted pricing. All this supported by Towers Watson s global pricing and technology consulting expertise. Put simply, Radar Live heralds a major leap forward and a new era in rate delivery for insurers. Don t get left behind. For more information contact [email protected] or [email protected] Towers Watson. A global company with a singular focus on our clients. Towers Watson Radar Live Benefits Risk and Financial Services Talent and Rewards towerswatson.com Copyright 213 Towers Watson. All rights reserved. TW-EU November 213. Towers Watson is represented in the UK by Towers Watson Limited and Towers Watson Capital Markets Limited.

3 A choppy voyage 213 UK Motor Insurance Industry Report Contents Introduction: a choppy voyage 4 and 213 in review: time to find bearings 5 Business operations : fair wind or foul? 9 Expense management: a change of tack? 14 Investment: dangerous under-currents 16 Reinsurance: murky waters 19 Underwriting and pricing: caught in the jaws of competition 21 Regulation/legislation: ebbs and flows 24 Periodical Payment Orders: what lies beneath 27 The IPO market: testing the breeze 3 Conclusion 34 Company performance 35 Appendices Appendix 1 Revenue account analysis of loss, expense and combined operating ratios 6 Appendix 2 Accident year analysis 64 How can Towers Watson help? 71 A choppy voyage. 213 UK Motor Insurance Industry Report 3

4 Introduction: A choppy voyage Having set a course towards calmer waters in early, the UK motor insurance industry is being dragged back into choppier territory. Continuing the more forward-looking focus of last year s Towers Watson UK Motor Insurance Industry Report, this year s edition takes the year-end figures reported to the Prudential Regulation Authority (PRA) as the starting point for a broader analysis of the underlying market dynamics. The good news is that the overall combined operating ratio (COR) was an improvement on 211. But recent experience tells us that things are rarely plain sailing in UK motor insurance. And so it is proving in 213, where there has been much to take on board for example, the impact of the implementation of the European Gender Directive in December of, and the initial ripples of far-reaching legal reforms enacted in the last 12 months. Significant as these have been, one should also not overlook the intense government and media scrutiny under which the sector has been operating, particularly as a factor in pricing policy. Amidst all these changes, we have had insurers listing on the stock markets and the additional spotlight this attracts. The combined effects of these changes and others, and the strategies available to companies to deal with them, are considered in more detail in features looking at: Expense management Investment Reinsurance Underwriting and pricing Regulation/legislation Periodical Payment Orders (PPOs) Initial Public Offerings (IPOs) in the motor market Detailed analyses of the overall and individual company PRA returns are included as appendices at the back of the report. The inescapable conclusion, at least in our view, is that further uncertain times lay ahead. 4 towerswatson.com

5 and 213 in review: time to find bearings The prospect of actually making money from writing motor insurance business itself after nearly 2 barren years came tantalisingly into view in. But, with prices having been cut steadily for several quarters, the opportunity to make profits any time soon looks to be sailing away into the distance. in retrospect UK motor insurers regulatory returns in showed a further improvement in the combined operating ratio (COR) result, moving to 14.1% from a restated 16% in 211 and continuing the descent from the astronomic levels of 21. The biggest improvement occurred in commercial motor, where the COR fell nearly five percentage points to 12.6% from 17.4% in 211. Gains in private motor were more modest, with a fall from a restated 15.5% to 14.6%. That is the good news. Figure 1. Total market results by account year Net combined operating ratio incl. prior adj. Net combined operating ratio excl. prior year Expense ratio Revenue year Net ultimate loss ratio incl. prior adj. Net ultimate loss ratio excl. prior year Prior year net ultimate loss ratio adj. Source: PRA returns (figures include an adjustment for UKI one-off restructuring costs). there has been almost universal public agreement that things have been heading in a less favourable direction as 213 has progressed. A choppy voyage. 213 UK Motor Insurance Industry Report 5

6 213 blown off course? However, 213 looks likely to take the wind out of insurers sails. First half results for 213 declared by insurers have been mixed, with some companies for example, Direct Line Group, announcing an improved COR in UK motor, but with others such as Ageas, worsening. Many of the companies that had profitable experience in the first half of 213 attributed this to a disciplined approach to pricing, favourable weather conditions and a general refusal to blindly reduce rates and follow the market. A number also reported more favourable claims experience with examples of much-increased claims reserve releases. Whichever camp individual companies fell into, there has been almost universal public agreement that things have been heading in a less favourable direction as 213 has progressed. This is principally due to the strong reductions in private motor premiums that can only really be attributed to companies banking on claims cost savings from the implementation of the Legal Aid, Sentencing and Punishment of Offenders Act (LASPO) and potentially further action in dealing with the growing problem of whiplash claims. Most insurers have anticipated some degree of cost savings to arise from the reforms. It is questionable, however, whether the savings will match the significant reductions in premiums seen since the end of 211 average quoted comprehensive premiums having fallen by 23% in the UK (according to the Confused.com Car Insurance Price Index in association with Towers Watson 1 ) over this period. This included an average quarterly price reduction of 7.9% in the second quarter of 213 and a third quarter price cut of a further 3.9%. It cannot be too long before such figures feed more broadly into insurers results. Thankfully, there now appears wide acknowledgement that price movements have gone too far perhaps partly driven by the need to court public and government favour and that companies have over-compensated for any benefits of legislation. Will companies have the courage of their stated convictions, in the face of a still intensely competitive market that nevertheless continues to get bad press about its treatment of customers? In order to avoid the worst vagaries of price competition, an alternative path to profitability potentially lies in better risk selection. Companies including Tesco Underwriting, Allianz and Direct Line Group announced drops in their 213 gross written premium income when compared to, and all cited their pricing approach. This move to better quality risks may well be an effective defence mechanism against the current extremes of pricing. Figure 2. Quarterly private motor price movements 2% 15% 1% 5% % -5% -1% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q Comprehensive Third party, fire and theft Source: Confused.com Car Insurance Price Index in association with Towers Watson. 1 Segmented analysis of UK private motor price movements is published every quarter. If you would like to be added to the mailing list, please contact [email protected] 6 towerswatson.com

7 Where next? In and the first half of 213 we have seen a continued dynamic and changeable environment for the motor insurance industry. The impact of the changes is proving hard to predict and this uncertainty has inevitably contributed to the premium volatility experienced. This period of transition is, however, far from over, with further reforms and the results of consultations and investigations in the pipeline. Senior executives will need to take a strong grasp of the rudder to steer the industry back onto the course it had been taking in early. Pricing is key, but there are challenges and opportunities associated with wider business operations such as claims and reinsurance, the full spectrum of regulatory and legal changes, the growth in Periodical Payment Orders (PPOs) and capital funding. A broader discussion of some of the key challenges facing motor insurers follows. Senior executives will need to take a strong grasp of the rudder to steer the industry back onto the course it had been taking in early. A choppy voyage. 213 UK Motor Insurance Industry Report 7

8 Business operations 8 towerswatson.com

9 : fair wind or foul? The dark clouds that have hung over the claims horizon for several years may be showing signs of dispersing in places. But have insurers already spent the figurative gold at the end of the rainbow? The latest figures from the Third Party Working Party (TPWP) the Institute and Faculty of Actuaries working party which investigates emerging trends in third party claims indicate some subtle changes in claims trends, some of them inevitably brought on by the then impending and actual introduction of the Legal Aid, Sentencing and Punishment of Offenders Act (LASPO) on 1 April 213, the reduction in fixed recoverable costs, and other reforms. Third party damage (TPD) end of the road for decreasing claim frequencies? The number of TPD claims has been steadily decreasing for many years. This decrease has been attributed to several factors including improvements in vehicle safety, better driving behaviours and a decrease in road usage since the 28 financial crisis all of which should result in fewer accidents and fewer claims. The latest industry data shows that in, while the number of these claims again decreased, the rate of decrease itself has started to reduce (see Figure 3). It is unlikely that this can be explained by an increase in road usage: The Department for Transport s National Travel Survey showed that the average distance travelled by car passengers continued to decrease from 211 to. Recent experience, therefore, may indicate that the long term decrease in TPD frequencies a trend that has given insurers some comfort in a time of otherwise troublesome trends may be nearing its end. It is also reasonable to conclude that, as the UK economy starts to show some signs of recovery, recent reductions in road use may start to reverse out. Switching attention to the cost of such claims, the analysis suggests that inflation on settled TPD claims is much higher than that on incurred claims. Without improvements in settlement speed this could be a worrying trend, indicating a potential weakening of TPD case reserves. Figure 3. Frequency of reported TPD claims private car comprehensive only Frequency 6.5% 6.% 5.5% 5.% 4.5% 4.% Exposure (million earned policy years during quarter) Q4 Q3 Q2 Q1 Q4 211 Q3 211 Q2 211 Q1 211 Q4 21 Q3 21 Q2 21 Q1 21 Q4 29 Q3 29 Q2 29 Q1 29 Q4 28 Q3 28 Q2 28 Q1 28 Q4 27 Q3 27 Q2 27 Q1 27 Calendar period Source: Institute and Faculty of Actuaries Third Party Working Party. A choppy voyage. 213 UK Motor Insurance Industry Report 9

10 Third party injury (TPI) mixed messages While injury claims frequency inflation remained on an upward trend, consistent with the key trends observed during the working party study during, average cost trends appear to be more benign than previously identified. Average cost per claim for the 211 accident year has developed favourably since the previous TPWP, now sitting at 4.5% above the equivalent developed position of 21 compared to 9% at this point last year. The year shows even lower inflation of 3% compared to 211, which may be a sign that case estimates are catching up with bodily injury inflation. However, the risk of unexpected development remains, in particular relating to frequency. In the period leading up to the April reforms there appears to have been a severe late wave of claims farming. As a result, at an overall third party level, the cost per vehicle year for appears to be around 7% worse than 211. The injury paradox Over the past few years, despite the reductions in the number of accidents mentioned above, the volume of bodily injury claims has increased in absolute terms (see Figure 4). Indeed, more than a third of accidents with a third party component now lead to a bodily injury claim. 211 has been the most severely affected year, with this proportion increasing by nearly 2% compared to 21. has seen a more modest increase of 4.5%, but the paradox of fewer accidents leading to more injury claims persists. more than a third of accidents with a third party component now lead to a bodily injury claim. Figure 4. Proportion of TPD claims with TPI component private car comprehensive only Reported claim numbers (exc nils) TPI/TPD ratio 4% 35% 3% 25% 2% 15% 1% 5% % Development month Annual percentage change 11-12: 4.5% 1-11: 18.8% 9-1: 1.9% 8-9: 9.3% 7-8: 8.3% 6-7: 6.7% Source: Institute and Faculty of Actuaries Third Party Working Party. 1 towerswatson.com

11 A glimmer of hope? Historically, the average number of claimants per claim has been a significant driver of injury inflation. In the space of six years, despite statistics from the National Travel Survey showing vehicle occupancy to be stable over the period, the average number of such claimants has risen by 15% (rising from 1.3 to almost 1.5 per claim). However, a glimmer of hope has emerged as this increase appears to have stalled. In the period since the Ministry of Justice (MoJ) 21 reforms, this rate while it is still high seems to have stopped its upwards trend (see Figure 5). Figure 5. TPI reported claimants per claim private car comprehensive only Reported claimants per claim (inc nils) Development month Annual percentage change 11-12: -.1% 1-11: 2.4% 9-1: -1.1% 8-9: 5.1% 7-8: 4.2% 6-7: 2.6% Source: Institute and Faculty of Actuaries Third Party Working Party. a glimmer of hope has emerged, as the increase in the average number of TPI claimants per claim appears to have stalled. A choppy voyage. 213 UK Motor Insurance Industry Report 11

12 A final hurrah? The analysis shows some unexpected late reporting of claims relating to 21 accidents. These late notifications could be the result of increased claims farming activity ahead of the April reforms, that is, a last ditch attempt to process as many claims as possible on pre-april reforms terms. This will be an area of particular concern for reserving actuaries, as it further complicates the question of how to adjust projections of post-april periods based on pre-april experience. Figure 6. TPI reported claims frequency private car comprehensive only Reported claim frequency (exc nils) 1.4% 1.2% 1.%.8%.6%.4%.2%.% Development month Annual percentage change 11-12: 2.9% 1-11: 3.8% 9-1: 4.8% 8-9: 7.4% 7-8: 3.5% 6-7: 7.3% Source: Institute and Faculty of Actuaries Third Party Working Party (late 21 drift highlighted). 12 towerswatson.com

13 Average cost per claimant As noted above, injury claim cost inflation appears to be slowing down. This can be explained by the stabilisation of average claimants per claim previously mentioned; indeed the levels of per-claim inflation seen in earlier years appear to have been mainly driven by these increases. However, Figure 7 shows that inflation on a perclaimant basis has remained relatively consistent at around 4% per annum. While this rate appears modest in comparison with severe injury increases seen overall, it is nonetheless notably higher than Retail Price Index (RPI) inflation over recent years. Figure 7. TPI average cost per claimant private car comprehensive only Incurred average cost per claimant 6,5 6, 5,5 5, 4,5 4, 3,5 3, Development month Annual percentage change 11-12: 4.3% 1-11: 4.8% 9-1: 1.6% 8-9: 3.6% 7-8: 4.1% 6-7:.1% Source: Institute and Faculty of Actuaries Third Party Working Party. management companies Our previous motor report discussed the relationship between the number of injury claims and the growth of claims management companies (CMCs). The ban on referral fees incorporated in LASPO recognised this dynamic in an attempt to bring such claims under control. It is interesting to note that, for the first time in any year, the revenue generated by CMCs in from financial products and services, such as payment protection insurance refunds, exceeded that from personal injury business. Furthermore, while it is still generally too early to discern the actual effect on claims, an MoJ report released on 23 July 213 confirmed that the referral fee ban had brought about a reduction of around 2% in the number of authorised personal injury CMCs. The report also stated that there has been a 22% drop in revenue from personal injury claims management activity during the year ending 3 November. So, while these figures would suggest cause for optimism among motor insurers, the longer-term effect on claim frequencies for different sizes of claim will have to be watched carefully. Emerging claim statistics suggest that the intended positive effects of various Government reforms have started to be realised. With recent price reductions, however, and as covered elsewhere in the report, have insurers already taken these positive developments into premium rates? And more importantly, will they play out as insurers have anticipated? A choppy voyage. 213 UK Motor Insurance Industry Report 13

14 Expense management: a change of tack? The industry s record on controlling costs remains patchy and indicates some new approaches may need to be considered to achieve sustainable reductions. Media reports of a number of insurers laying off staff and closing offices during 213 come as no great surprise in the wake of the regulatory returns. Expense ratios for total motor rose for the second year running, even though the rate of increase slowed ( was 6% higher than 211, which was 11% higher than 21). Private motor has seen the most significant increases in expense ratio in the last two years, with 211 (27.5%) being a massive 17% higher than 21 (23.6%), and (29.1%) being 6% higher than 211. Admittedly, the overall results are somewhat skewed by the performance of one company but, even with its expense levels removed, the rest of the market s expense ratio went up in. Consequently, it will be interesting to see what effect the actions taken so far in 213 will have on aggregate expense levels. Overall expense ratios are at least still below the levels seen in 28 to having registered the highest expense ratio over the previous dozen years, although this may have as much to do with the premium increases put through in 21 and 211 as with direct action on expenses. The question, therefore, is whether the market is really making in-roads into managing expenses more effectively or if there is an anchor effect on the industry s current approaches to expense management? Splitting down into components of the expense ratio, half of the total expenses in related to acquisition costs, with administration making up 3% and claims handling fees accounting for the remaining 2% of total expenses. Figure 8. Expense ratio trends and components (total motor) Expense ratio management costs expenses Commission/acquisition expenses Expense ratio Source: PRA returns. The question, therefore, is whether the market is really making in-roads into managing expenses more effectively or if there is an anchor effect on the industry s current approaches to expense management? 14 towerswatson.com

15 As shown in Figure 8, the upward movement of combined private/commercial motor expenses in the last two years is mainly accounted for by a rise in commission/acquisition expenses. This is rather surprising because, despite the highly competitive environment and tendency for people to regularly switch between providers, anecdotal evidence indicates a general decrease in the proportion of expenses spent on acquisition over the past five years. This latter trend might be accounted for by the proportion of private business written via aggregators having increased (it being cheaper to sell a policy on a price comparison website than via a call centre). Even allowing for some reporting variations and the possibility that some insurers have incurred exceptional costs during this period, the upturn may involve some insurers needing to further review their existing broker and commission arrangements. Variable performance Not all of the big companies have followed the overall market trend. Allianz and AXA s expense ratios fell for the third consecutive year for combined private and commercial motor, and Aviva, Groupama and Liverpool Victoria private motor ratios have also fallen for three straight years. Direct Line Group (UK Insurance or UKI), CIS, RSA and Ageas are among those to have seen increases in. Figure 9. Private motor expense ratios by company % Tradex Sabre Tesco Ageas esure AXA USAA Aviva Total Highway NFUM AIG LV Groupama CIS Allianz RSA Aioi UKI Chubb Travelers handling Source: PRA returns/towers Watson analysis. Difficult decisions Taken in aggregate, the market s overall combined operating ratio of over 14% in and the sizeable average price reductions witnessed in the first half of 213 in private motor (see page 6), would still indicate a strong argument for further tight management of expenses. Knowing where to cut costs is easier said than done. Companies have to be cautious about and monitor closely the impact that broadly-based cost reduction initiatives may have upon service levels, product quality and customer satisfaction. Our recommendation is that firms should consider not just the level of costs within the business, but the balance between fixed and variable expenses. This typically involves establishing more flexible cost bases that can expand and contract with the cycle. In this way, expenses increase in the good times and contract in the bad, leaving expense ratios at broadly reasonable levels. Ways of achieving this could include greater use of variable pay, developing a multi-skilled workforce that can move from one activity to another depending on points in the product cycle, and the specification of activity-based outsourcing contracts. Overall expense ratios that are once again creeping up are a worrying sign for the industry. Alongside some of the broad and tough measures already implemented by some of the publicly listed companies, all options for managing the inherent and growing complexity of the motor sector should remain on the table. Aviva Total A choppy voyage. 213 UK Motor Insurance Industry Report 15

16 Investment: dangerous under-currents Insurers have so far ridden out the effects of the so-called investment cliff relatively well, but with the yields on the low risk assets that the sector has typically preferred at rock bottom, alternative strategies may be required to support overall financial returns. Investment returns for most motor insurers have been strong over recent years, driven by falling bond yields resulting in increased capital values. In addition, returns on corporate bonds, equities and other riskier assets (although, not as commented below, government bonds) have largely recovered since the depths of the financial crisis. These returns have contributed significantly to overall return on equity for motor insurers, and in many cases have helped to mitigate the impact of underwriting losses. However, yields on short-dated government bonds are now around 1%, with limited scope to fall further. The position for motor insurers looking forward is therefore very different to the recent past, as has already been evidenced in the last 12 months when returns have stalled. The current economic environment presents significant difficulties in looking to achieve a comparable return to that earned over the past five years. These investment challenges can currently be split into two main areas: 1. Generating higher returns under a low yield environment 2. Managing the risks of increasing interest rates Figure 1. Historical yields and total returns on short duration bonds (Barclays Capital UK 1-5 yr gilts index) Yield (% pa) Total return Jun 28 3 Jun 29 3 Jun 21 3 Jun Jun 3 Jun 213 Yield Total return (3 June 28 = 1) Source: Barclays Capital/Towers Watson. There is a wide range of fixed income assets that have not historically been used by general insurers 16 towerswatson.com

17 Increasing returns in a low yield environment The focus of motor insurers is typically on maintaining assets to support the underwriting activities, rather than investment being a core activity. Consistent with this, investment strategies adopted by motor insurers are typically cautious, with investments mainly in cash, government bonds and high quality corporate bonds. However, under the current low yield environment, it is these low-risk investments that appear least attractive, and most insurers have been considering options to pursue some level of increased yield. There are various approaches that can be taken to increase prospective yields, but each of these is not without challenges. One option to increase yield is simply to increase the amount of investment risk taken with the assets. In making this comparison it is useful to compare current risk-free yields on government bonds against those that could be expected before the onset of the financial crisis. As can be seen from Figure 11, yields are now around 3% to 4% lower than five years ago, and to achieve a similar yield to before, a significantly more risky strategy with investment in sub-investment grade bonds and other risky assets would be required. In our experience, there are very few insurers who are willing to accept the extra risk of making a material move into sub-investment grade bonds, but we have observed a general trend to taking some measured increase in investment risk. Indeed, such a move may appear attractive in improving return on capital, as due to the diversification between investment and underwriting risks, a moderate amount of extra investment risk may lead to only a small increase in the overall capital requirement. However, it will be important to confirm that any increase in investment risk remains supportable by the balance sheet and is consistent with the risk tolerance of the key stakeholders, such as shareholders and bondholders. A further option being considered and implemented by some general insurers is to diversify the investment strategy more widely by moving into new asset classes. There is a wide range of fixed income assets that have not historically been used by general insurers, including emerging market debt and syndicated loans, which are now being evaluated or implemented. These alternative credit assets can offer the prospect of a higher risk-adjusted return through greater diversification of credit risk. However, we believe it is important to balance this financial efficiency against other more qualitative aspects, such as the extra complexity involved and the implementation and ongoing management burden. most insurers have been considering options to pursue some level of increased yield. Figure 11. Historical yields on short duration bonds Yield 7% 6% 5% 4% 3% 2% 1% % Gilt yield 31 Aug 28 Gilt yield 3 Aug 213 AA corporate 3 Aug 213 BBB corporate 3 Aug 213 Emerging market debt 3 Aug 213 High yield 3 Aug 213 Source: Barclays Capital/Towers Watson. A choppy voyage. 213 UK Motor Insurance Industry Report 17

18 Managing returns under an increasing interest rate environment Another key risk associated with the current low yield environment is of significant future rises in interest rates, resulting in capital losses on fixed income assets. It is important to understand the nature of this risk. The market is already pricing in increases in bond yields/interest rates (see Figure 12) but the true risk over the short term is that yields rise faster than predicted by the market. Figure 12. Market implied future bond rates as backed out from the 3 August 213 government bond yield curve Yield 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % Year 3 year bond yield implied by current market pricing Source: Towers Watson There is currently much uncertainty around the future direction of bond yields, around which there has been recent significant volatility due to the possible cutting back of fiscal stimuli by the major global central banks. As a result of this uncertainty, and also signs that economic growth is slowly recovering in the developed world, bond yields have recently increased with associated losses on fixed income assets. The prospect of a reduction in the level of fiscal stimuli has also had an impact on market values of risky assets, such as equities. Many general insurers have been evaluating their exposure to future increases in yields. To mitigate this risk, some general insurers have been reducing the interest rate risk in their assets, either by moving bonds into cash, or by using derivatives to manage the interest rate exposure. Whilst such a move does reduce the overall interest rate exposure, this may lead to a greater mismatch against the true economic value of the liabilities (and, in a future Solvency II or IFRS regime, their solvency and accounting value) and we believe it is important to consider any implications for expected return from making these switches. No silver bullet The current economic environment presents significant investment challenges for motor insurers, both in looking to achieve a reasonable yield relative to that earned historically, and in managing exposure to increasing interest rates. In our experience, there is no silver bullet that can solve these issues, but we have recently seen many general insurers (including motor insurers) review their overall investment approach to make it more resilient to the current investment climate, recognising that the existing strategy is unlikely to remain fit for purpose. * The additional investment issues arising from motor insurers exposure to Periodical Payment Orders (PPOs) are addressed in the article on page towerswatson.com

19 Reinsurance: murky waters Creative risk transfer solutions may be needed as the general volatility in the motor market and the particular issue of Periodical Payment Orders (PPOs) have caused reinsurance costs to soar. The uncertainties surrounding the motor insurance market in recent years, in particular the worsening trends of bodily injury claims (see page 1) and the rise in PPO awards (see quote below and page 27), fed through into the and 213 reinsurance renewal seasons. For those companies typically buying higher levels of reinsurance this has had potentially significant cost implications. Starting with the renewal season, motor reinsurance prices rose by an average of 15 to 25%, although rises for underwriters buying at higher deductibles typically exceeded this range. Even with these increases, however, risk appetite from reinsurers was sharply divided come January 213. Around 2% of motor reinsurance capacity withdrew from the market, with many citing concerns about the potential costs and management issues associated with PPOs as a primary reason. Even so, the resultant capacity shortage and hardening of prices enticed companies such as Hannover Re and Berkshire Hathaway to significantly increase their market participation and encouraged new market entrants such as Q-Re. Nevertheless, loss-free accounts renewed with typical rate increases of 2 to 3%, whilst those with losses had to take on board increases of over 35%, with the larger increases typically reserved for the higher reinsurance layers. Lower down the layers (up to approximately 5 million), rate increases were more modest. Cognisant of the potential impact of such increases, some organisations offered two quotes, one including a capitalisation clause with a cheaper premium and one without such a clause. That said, most primary insurers steadfastly refuse to accept capitalisation clauses, citing that they significantly dilute the purpose of reinsurance. Managing risk from PPOs abbreviated excerpt from esure IPO prospectus They (Periodical Payment Orders - PPOs) add an increased risk (i.e. mortality) which can increase the uncertainty of the total cost and, as a result of the indexation allowance built into reinsurance treaties being generally lower than the indexation allowance built by the courts into PPO claim settlements (generally based on the ASHE index), reinsurance may not cover the full costs of such claims. A choppy voyage. 213 UK Motor Insurance Industry Report 19

20 Forward navigation Such circumstances help account for insurance media reports that certain insurers have opted to retain a higher level of risk and reduced their traditional reinsurance cover as a result. Our observations suggest that increases in retentions of 3% to 5% are not uncommon, but with considerable variability between companies, largely based on their individual reinsurance layer requirements. There are examples, however, of primary insurers simply raising the drawbridge on writing motor risks. Until there is greater clarity about how the motor market will address the PPO issue, uncertainty will continue to feed through into motor reinsurance costs. Some have placed their hopes on a pooled solution, overseen by a third party, but this would take time to arrange even if it could be agreed. In the meantime, companies may need to look to other sources for capital-saving ways of risk transfer. By pooling up general motor and PPO risks with other classes of business, companies may find brokers and reinsurers more amenable to arrangements such as adverse development covers and stop loss covers. Similarly, co-insurance more typically seen for risks underwritten in different territories of Europe could have an application for companies that are using internal models and are able to agree to pool a diverse mix of motor risks. Other options for cutting down on costs could involve part-placing a reinsurance layer or, similarly, where capitalisation clauses are an issue, cedants might choose to mix the terms with different reinsurers. Whichever route insurers choose to take, concerns about the effect of PPOs on motor liabilities will undoubtedly persist among reinsurers until their impact is more fully understood. Primary insurers will need to keep their options and minds open to creative risk transfer solutions by making full use of their large claims and reinsurance models to optimise strategy. Until there is greater clarity about how the motor market will address the PPO issue, uncertainty will continue to feed through into motor reinsurance costs. 2 towerswatson.com

21 Underwriting and pricing: caught in the jaws of competition After making progress in catching up with injury claims inflation, reductions in reserve releases and dwindling investment returns, underwriting discipline looks in danger of sinking back into the shark-infested waters of intense price competition. The overall market loss ratio (before expenses) moved further downwards in to a more sensible 75.7%, having peaked at over 96% in 21. Figures like this should be a positive indicator for industry commentators, like us, who for several years have been calling for greater underwriting discipline to be reflected in risk selection and pricing. But, as commented on elsewhere in this report, 213 is not looking good from a pricing perspective. Companies are in danger of undoing some good work on the underwriting front, particularly in combatting fraud, and in personal lines more generally, where price competition and transparency have left little room for substantial differentiation. That said, there is plenty more for companies on which to focus. Emerging underwriting battlegrounds Probably the key area for insurers looking to gain competitive advantage in years to come will be data. Much as the term big data is in danger of becoming over-hyped across the business world in the same sense as the paperless office was 25 or so years ago data does nonetheless represent one of insurers greatest assets. The way that companies are able to use that data will have a significant bearing on comparative underwriting performance over the next few years. For example, we are aware of companies seeking to derive greater underwriting sophistication from marrying marketing, pricing and underwriting in order to better understand the concept of customer value. Activities of this type are helping those companies evaluate their brand attractiveness to different groups of potential customers on price comparison sites, and set prices accordingly. Internal data has the potential to deliver incremental gains in most cases. The bigger opportunity, and where the industry has been generally slower to react, is in sourcing and harvesting external data sets that offer the potential to enhance predictive pricing factors and to augment fact checking and fraud detection processes in order to validate quote requests. Other refinements to underwriting processes, in areas such as vehicle classification, can also deliver benefits. The LASPO effect Regardless of the degree to which companies enrich their data sets for better underwriting, any bottom line gains can only be sustained with rational pricing. As discussed on page 6, the huge collective bet that the industry appears to have taken on the expected benefits arising from the implementation of the Legal Aid, Sentencing and Punishment of Offenders Act (LASPO) and other reforms during and in the first half of 213 is already openly being questioned, even by senior people on the inside. The bigger opportunity, and where the industry has been generally slower to react, is in sourcing and harvesting external data sets A choppy voyage. 213 UK Motor Insurance Industry Report 21

22 Gender neutral pricing By comparison to the impacts of LASPO and other reforms, the European Court of Justice (ECJ) ruling requiring gender neutral pricing of financial services products that took effect on 21 December, appears to have been absorbed relatively smoothly. Starting in the final quarter of and continuing into the first quarter of 213, the youngest female drivers began to see the impact of averaging strategies coming through in their premiums that most people had predicted before the ECJ ruling took effect, with movements in the second quarter of 213 implying that pricing parity between the genders has been achieved. The focus amongst insurers has subsequently been on ensuring compliance throughout what is a very complex chain of data, analysis, decisionmaking and price delivery, through a multitude of distribution channels, some of which involve other parties such as brokers. Figure 13. Quarterly price movements for 17-2 year old drivers Price movement 2% 15% 1% 5% % -5% -1% -15% Q1 Q2 Q3 Q4 213 Q1 213 Q2 Female Male Source: Confused.com Car Insurance Price Index in association with Towers Watson. Telematics Of course, the potential game changer for motor underwriting and pricing is telematics the use of monitored driving behaviours to assess risk. Several more companies, including Direct Line, Admiral, AA and Aviva, have thrown their hats into this particular ring relatively recently. Backing up previous market growth forecasts from the Association of British Insurers, research carried out by Towers Watson in the first half of 213 on consumer attitudes towards telematics insurance in the six largest European insurance markets, including the UK, showed that half of British drivers are interested, rising to two-thirds on a try before you buy basis refuting the commonly held belief that telematics insurance is exclusively a young person s product. 22 towerswatson.com

23 Figure 14. Age profile of UK consumer attitudes towards telematics insurance 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % plus Definitely/probably Definitely not/probably not Not sure I already have such a policy (i.e. I have a black box in car) Source: Towers Watson/CCB fast.map survey 213. A fuller discussion of the potential and opportunities for telematics can be found in the report Telematics: what European consumers say, 2 but other headline UK findings included: 57% of UK drivers are interested if there is a guarantee that their insurance premium will not increase. Those who drive more frequently are more interested in telematics. Pay as you drive products are therefore likely to penalise the very drivers who are most interested in telematics. Working-age female drivers over 35 find a try before you buy option particularly attractive. Value-added assistance services, such as automated emergency services call-outs, are appealing to British drivers. One cannot overlook telematics for small and mid-sized fleet business either. The technology is well established in the large fleet world, primarily as a means of optimising vehicle utilisation through routing and idle time management, but typically without any linkage to insurance. Adapting personal lines telematics propositions to smaller and mid-sized fleets could offer many of the same fleet management benefits within the wrap of insurance. This would offer insurers the benefit of basing underwriting and pricing on actual miles driven and respective driving behaviours and also potentially enable fleet owners to reward better driving behaviours that lead to reduced premiums. the potential game changer for motor underwriting and pricing is telematics. Internal struggle? The current situation could almost be characterised as an internal struggle between solid underwriting and the need for competitive pricing. Clearly, it is not a black and white choice for insurers, but whichever view prevails will go a long way to determining near-term prospects. 2 A choppy voyage. 213 UK Motor Insurance Industry Report 23

24 Regulation/legislation: ebbs and flows Regulatory and legislative changes actual or threatened have contributed to the challenges faced by motor insurers in keeping their businesses on a firm footing in recent times. Early 213 saw the implementation of a number of these changes, notably with the Legal Aid, Sentencing and Punishment of Offenders Act (LASPO) passing into law. What early observations can we make on the effects of the changes to date? Figure 15. Timeline of regulatory and legal reforms Quarter Quarter Quarter Quarter Quarter 13 Sept 211 Jack Straw s 1 Minute Rule Bill 2 Dec 211 OFT publishes results of motor pricing investigation 9 Feb MoJ response to consultation of legal fixed fees under the Portal 14 Feb Government summit on motor insurance 1 May LASPO bill receives Royal Assent 2 May Follow up Government motor insurance summit 31 May OFT provisional referral of credit hire/repair to Competition Commission 28 Sep Private motor insurance market referred to the Competition Commission 23 Oct Consultation on Ogden discount rate methodology closed 19 Nov MoJ publishes Portal fixed fees proposals 21 Dec Gender neutral enforcement So far 8 Mar 213 Consultation on whiplash injuries in England and Wales closed 1 Apr 213 LASPO implementation and increase in general damages awards Apr to Jul 213 Reduction in Portal fixed fees 7 May 213 Further consultation on Ogden discount rate issued 31 Jul 213 Extension of upper limit on claims through Portal (NB: The impact of the Gender Directive is covered in the underwriting and pricing article on page 22). 24 towerswatson.com

25 ebb? Perhaps most significantly, the payment of referral fees has been banned in personal injury and the fixed recoverable costs for claims within the Portal have been significantly reduced. While the impacts on claimant severities can be easily calibrated on historical data, the longer-term effect on claim frequencies for different sizes of claim has to be carefully monitored. In the period leading up to April 213, insurer claims data and statistics from the Portal suggested a significant increase in claim notifications, but whether this simply represented an advance in the timing of notification or a genuine increase in claims may only become apparent early next year. Recent statistics from the Portal indicate a marked reduction in claim notifications (see Figure 16 below). The key aspect of the changes, in our opinion, is that they reduce the economic value that is available to commercial interests from a motor claim. In other words, there will be less money available to parties other than the genuine victim of the claim. Nonetheless, it will be important to monitor the incremental impacts of the reforms in order to validate assumptions feeding into pricing and reserving. Worthy of particular note will be whether the observed reductions in frequency prove short-lived as the claimant supply chain recovers from its dislocation. Insurers cannot discount the possibility of a rebound in claim frequency if claims management companies and claimant solicitors can re-optimise their business models in light of the changes. A clear picture of the impact of the reforms may only be visible in early 214. Of course, to varying extents referral fees had been an income stream for insurers themselves. A number have sought to offset any loss in that income by establishing Alternative Business Structures (ABSs) in order to retain a foothold in the altered claims value chain. Under these structures, insurers can take a stake in firms providing legal services to claimants. management companies and medical reporting organisations are also expected to enter into ABSs in response to the ban on referral fees, enabling a full range of claimant services to be carried out under one roof. Recent statistics from the Portal indicate a marked reduction in claim notifications. Figure 16. Number of claims notifications sent per month Number of claim notification forms 1, 9, 8, 7, 6, 5, 4, 3, 2, 1, May-1 Jun-1 Jul-1 Aug-1 Sep-1 Oct-1 Nov-1 Dec-1 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Source: Management Information Portal. Notification month A choppy voyage. 213 UK Motor Insurance Industry Report 25

26 Such moves are indicative of the shake-up affecting the whole motor insurance legal infrastructure. A key area of continued uncertainty is the potential impact of an increase in the upper limit for the small claims track from 1, to 5,. This would take further legal cost out of the system since it might mean that more claimants are self-represented and, as such, insurers would have greater scope to challenge dubious claims without risk of having to pay significant third party legal costs. However, the Transport Select Committee has recently questioned whether this would be an appropriate move, fearing an impairment of access to justice. The committee also suggested that insurers should not be allowed to settle claims before a formal medical report has been submitted and that there should be tougher action on fraudulent claims. Calls by the committee for insurers to put their house in order may indicate the political tide turning against insurers after a favourable run. Figure 17. Summary of key reforms Item Date Implementation method Referral fee ban April 213 LASPO Removal of recoverability of success fees and ATE premium April 213 LASPO Damages based agreements April 213 LASPO 1% uplift in general damages April 213 Simmons v Castle Qualified one way costs shifting April 213 Civil Procedure Rules (CPR) Reduction in fixed recoverable costs in claims portal April 213 Civil Procedure Rules (CPR) Vertical extension of Portal to include claims of up to 25, July 213 Civil Procedure Rules (CPR) Increase in the upper limit of the small claims track from 1, to 5,? Civil Procedure Rules (CPR) Introduction of independent medical panels to assess whiplash 214?? Going with the flow This continuing ebb and flow of the legal and regulatory landscape surrounding motor insurance only goes to show that insurers cannot take for granted that reforms will necessarily develop or emerge in the way envisaged. For example, as already discussed elsewhere in this report, there is a growing feeling that insurers have overplayed the LASPO (and other reforms) card in their approach to prices. Insurers will be hoping for a positive outcome from the fledgling proposals to introduce a greater level of proof in whiplash cases. Against that, we should not forget the Competition Commission investigation, the provisional findings of which, due in October or November 213, are likely to focus on issues of perceived fairness in the way insurers interact with customers, including the area of differential pricing for new and renewing customers. In the meantime, LASPO and related measures have taken cost out of the system for some time, leaving aside for a moment the question of whether insurers have already effectively spent the savings on premium reductions. It seems probable that ABSs will take us at least some of the way back to where we were. When translating evolving and impending reforms into business actions, insurers will need to keep testing the legal and regulatory waters to see just how deep they are or might become. This continuing ebb and flow of the legal and regulatory landscape surrounding motor insurance only goes to show that insurers cannot take for granted that reforms will necessarily develop or emerge in the way envisaged. 26 towerswatson.com

27 Periodical Payment Orders: what lies beneath While the industry s awareness of Periodical Payment Orders (PPOs) and accompanying reserving techniques is undoubtedly improving, in our opinion many insurers are still overlooking or underestimating aspects of the PPO iceberg that could potentially damage them below the waterline. In our UK Motor Insurance Industry Report, we noted that the emergence of PPOs has increasingly pushed the risk associated with the cost of long-term care of serious accident victims on to motor insurers. Latest data While the actual number of PPOs awarded by the courts appears to have stabilised, as shown by Figure 18, this should not be cause for complacency. PPOs will continue to be an everincreasing proportion of motor insurers reserves as more and more appear on, and remain on, the balance sheet over a period of decades. Figure 18. PPO propensity by settlement year PPO propensity (percentage) Total number of large claims (including PPOs) Settlement year Exposure Propensity Source: Institute and Faculty of Actuaries PPO Working Party. A choppy voyage. 213 UK Motor Insurance Industry Report 27

28 Plugging the gaps PPOs have created a whole raft of issues that are unfamiliar to most general insurers. Over the last year those that, in our opinion, have pushed to the top of the list of matters requiring attention are: mortality assumptions and discount rates; buying reinsurance; investment and asset matching; the cost of capital; and monitoring the impact of the proposed Solvency II Long-Term Guarantee package. Mortality assumptions and discount rates Many insurers have made the adjustment to using life insurance actuarial techniques to project the cost of claims that may have to be paid for 4 years or more. That is positive news. As yet, however, there is relatively little sophistication or commonality in the approaches being adopted, with very few companies currently appreciating and factoring in the significant impact that different life impairment adjustment approaches can make. The issue is that PPO recipients are far from standard. Many accident victims have suffered complex brain injuries where future life expectancy is almost completely unknown based on current understanding. Suggested moves towards greater classification of brain injuries may help, but due to the thankfully relative few cases, there will never be enough data or at least not for a long time to shed much light on the question. This strengthens the case in our view for using all available industry and proprietary data to enhance standard mortality statistics. Beyond the question of how individual insurers value their potential PPO liabilities more accurately, the current lack of consistency has potential wider repercussions for the external transparency of underwriters accounts and, in some cases, for full internal understanding of performance. This already applies to the discount rate being used, which is making it increasingly difficult to make comparisons between different motor insurers due to the variety of assumptions in force. For example, in working out the effect of inflation, insurers need to take account of earnings inflation. History shows that earnings have typically outpaced the Retail Price Index by 1.5% to 2% but that has clearly not been the case in very recent years. What do insurers do? The answer at the moment varies considerably from one insurer to another. Furthermore, the different allowances for the possibility that changes in the Ogden discount rate could impact upon PPO propensity serves to contribute further to the lack of transparency and clarity around PPO liabilities. One way to take some of the uncertainty out of the current situation, and ease the workload on individual insurers, could be to take an industry-wide approach. This could take the form of agreed disclosure of PPO liabilities on an industry standard set of discount rate and mortality assumptions, as happens in many European countries with similar annuity-based claims. Buying reinsurance The learning curve the industry is undertaking has had a ripple effect, particularly in the reinsurance market, and has led to hefty price rises and further uncertainty. Notably, many motor reinsurers have introduced capitalisation clauses, whereby they pass the risk back to the primary insurer in return for a lump sum, specifically to deal with the PPO issue. Motor insurers are having to adapt rapidly to a new set of rules of the game when it comes to reinsuring books containing PPO liabilities. The issues are covered in more detail in the reinsurance article see page 19. Many insurers have made the adjustment to using life insurance actuarial techniques to project the cost of claims that may have to be paid for 4 years or more. That is positive news. 28 towerswatson.com

29 Investment and asset matching In previous papers on PPOs, we have cited the fact that the inflationary nature of the payments linked to the Annual Survey of Hours and Earnings (ASHE) is not possible to hedge with commonly traded market instruments. The so-called investment cliff has complicated matters further. The cost of hedging the very long-term payments associated with PPOs using swaps or gilts is very high at the current time due to the very low level of yields, as shown in Figure 19. Finally, execution risk for bespoke, long-dated hedging instruments (for example, the risk of paying sub-optimal prices for hedging instruments such as derivatives) can be elevated for investors new to this area. Figure 19. UK real yield curve as at 31 May 213 Years Percentage ILG spot yield curve as at 31 May 213 Source: Towers Watson analysis. Consequently, insurers may need to look to back these PPO liabilities in a more efficient manner by using long-term illiquid instruments such as property and infrastructure debt (as some companies already are). Cost of capital PPOs make investors and other capital providers nervous and, in our view, it is important for motor insurers to develop comprehensive capital models enabling them to understand the capital and risk implications of current and future PPO claims. Solvency II Long-term Guarantees package The latest draft of the Long-term Guarantees package associated with Solvency II has been arrived at with virtually no input from UK general insurers. Consequently, it is exclusively geared towards life and protection products. As it stands, this could impose a measure of the risk-free discount rate upon general insurers, without any reference whatsoever to the nature of PPO liabilities. The result could be punitive solvency capital requirements. It is therefore very much in the interests of motor insurers to engage in the continuing consultation process now as, once written into legislation, it will be very difficult to change subsequently. The delay of the European Parliament s vote on Solvency II to March 214 has given UK general insurers a little more time to engage to ensure their particular circumstances are taken into account. Bringing the issues to the surface It is apparent that the emergence of PPOs is fundamentally changing the shape of many general insurers balance sheets. In 2 or 3 years time some will look more like defined benefit pension schemes than what we currently think of as general insurance companies. There still appears to be a lack of full appreciation in some quarters of the range and scale of the future impacts, coupled with a lack of action on the part of many who have the power to influence matters now. While large parts of the industry have been slow to take up the mantle, the potential impact of PPOs is now permeating even the most senior executive levels, and if action is not taken now, motor insurers will be living with the consequences for many years to come. A choppy voyage. 213 UK Motor Insurance Industry Report 29

30 The IPO market: testing the breeze Two equations for how much your company might be worth. With both esure and DLG going public over the last year, and a number of other UK motor insurers rumoured to be considering this option, it is maybe time to ask how much your company, or your UK motor operations, might be worth on the open market. The answer may be more straightforward than you think. For a publicly traded company, value rightly or wrongly is based on how much the stock market believes that company is worth at any given point in time. In the case of operations which are not (yet) publicly traded in their own right (for example, when considering spinning off part of a larger firm), the value of the operation is often derived by applying metrics in one of two ways: the market comparables approach and the regression approach. The market comparables approach With the market comparables approach, the analyst selects a universe of publicly traded firms which are similar to the target firm. Some average or median of the price to book value (PBV) or price to earnings (PE) ratio of these firms is taken and then applied to the book value or earnings of the firm to determine the market price. From the perspective of the UK motor market, we now have three publicly traded UK motor insurers with a diverse set of features Admiral, DLG and esure. To add further credibility, we can expand this universe to include a number of other predominantly motor and personal lines insurers from overseas in the US and Canada. See Figure 2. Figure 2. Market data - publicly traded primarily personal lines/motor insurers Market Firm Region Ticker Exchange Cap (m) PBV PE ROE Growth Progressive US PGR NYSE 14, % 34.2% Intact Canada IFC TSE 9, % 14.5% Admiral UK ADM LSE 3, % 2.7% DLG UK DLG LSE 3, % 54.6% Mercury US MCY NYSE 2, % 88.1% esure UK ESUR LSE 1, % 14.5% Safety US SAFT NASDAQ % 3.1% Infinity US IPCC NASDAQ % 124.2% (see note 3) Given these benchmarks, it should be straightforward enough to select a similar firm or firms and use those benchmark PEs or PBVs to value a given target. But, for a rough guide, this is actually a rather involved process which must be undertaken on a firm-by-firm basis allowing for the different characteristics of different firms. So, with this is mind, firms might consider an alternate approach a simple linear regression. The regression approach The regression approach uses fundamental analysis to first express ratios as functions of their key determinants or fundamentals: PBV the PBV can be expressed as a function of the return-on-equity (ROE), risk, growth (expressed as an expectation of growth in earnings per share over the next x number of years) and dividend payout ratio (or reinvestment rate). PE the PE ratio can be expressed as a function of the risk, growth and dividend payout ratio. 3 towerswatson.com

31 Then, using a similar (although often broader) universe of firms as with the market comparables approach, a regression line is fitted, modelling the multiple of the firm as a function of the key fundamentals or proxies of those fundamentals if necessary. The market price of the target is determined by plugging the fundamentals of the target into this regression line and solving. A substantial amount of research has been dedicated to fitting such models of varying degrees of complexity (and success) to different industries and validating the findings. Figure 21 shows two simple models of the motor insurance sector a linear regression expressing PBV as a function of the backward-looking ROE (that is, earnings over the previous year expressed as a percentage of average equity over the period) and PE as a function of the forward-looking one-year expected growth in earnings based on consensus analyst estimates. Figure 21. The graphical relationship between ROE to PBV and growth to PE. The size of the bubbles indicates the relative market capitalisation of the different companies PBV 9x Admiral 8x Infinity 7x 6x Mercury 5x 4x Progressive esure 3x 2x Intact 1x Safety DLG x % 1% 2% 3% 4% 5% 6% 7% ROE PE 35x Safety 3x 25x Intact Mercury Infinity 2x 15x DLG Progressive 1x 5x Admiral esure (see note 3) x -2% % 2% 4% 6% 8% 1% 12% 14% Growth A choppy voyage. 213 UK Motor Insurance Industry Report 31

32 The upward-sloping relationship is what we would expect firms with higher profitability and better growth expectations are more valued. But what is most striking about these figures is the degree to which these models explain the variation in price (that is, the above simplistic models are nearperfect fits, approximately 96% R 2 on average). In most other industries and studies we would see a great deal more scatter around the base line. This consistency indicates that if the owners of a UK motor insurance operation were interested in what their company might be worth during an IPO, as a back-of-the-envelope they could plug last year s ROE or next year s growth estimate into the following equations to come up with a reasonable range: P = [11.67 x ROE +.47] x Book value P = [9.78 x Growth ] x Earnings The company might actually be worth more or less, but the market currently does not think so. Fluctuating fortunes That said, there is one other fascinating relationship which arises from the above analysis there is extremely strong negative correlation between past earnings and future growth projections. This negative dependence implies that the market, in valuing these motor insurers, is allowing for firms with above average earnings over the last year to have below average earnings growth over the next year and firms with below average earnings last year to have higher than average earnings growth next year. So in refining a rough valuation, a key question to ask is whether or not a firm with abnormally high profits can be expected to sustain that profitability at a similarly high level or conversely, whether a firm losing money will continue to lose money? Given what we know about the profitability of the UK motor market and degree of variation in performance of various insurers, this is something worth investigating closely, as an investment opportunity may exist. Is it that simple? The above paints a very simple model of valuation. In reality, there are numerous other considerations which should be taken into account in developing a more versatile discounted cash flow type model for valuing the worth of a company including reserve adequacy, the operational model of the business, and the degree to which operational reinvestment and innovation will allow the insurer to continue to compete in an extremely competitive, cyclical and evolving market. Of course, this is not to say that the market is not considering other indicators beyond these simplistic multiples or that the market will continue to value these firms in this same manner prospectively. As the traditional caveat goes past performance is no indicator of future performance. But it is interesting, and a simple model can sometimes tell a big story. The company might actually be worth more or less, but the market currently does not think so. 3 Market caps are given in local currency as at 7 June 213, taken from Bloomberg. PBV, PE and ROE are calculated against year-end figures from the companies annual returns. Growth represents the analysts consensus for one-year growth expectations in net income (with the exception of Infinity where a two year forward-looking growth figure is used) with estimates taken from Bloomberg on 7 June towerswatson.com

33 Get on the road to telematics Clear the way to a new motor insurance proposition Are you in danger of trailing behind in the fast-developing telematics insurance market? There are many moving parts to get right creating successful programmes involves much more than simply sourcing a device and offering price discounts. Telematics cuts across many areas of your insurance operation. We have specialists who can assist with strategy development, proposition design, marketing and distribution, and programme management. Our technology partners provide devices, data communications and customer feedback infrastructure. Together we provide comprehensive support and knowledge that has helped create and launch successful telematics products. At the heart of our offering is a sophisticated analytic capability that is based on rich, short interval data. The insight flowing from this granular data analytics creates the foundation of effective product design and driver feedback programmes. Towers Watson offers speed to market, based on proven telematics experience and a product built for the future. For more information contact [email protected] or [email protected] Towers Watson. A global company with a singular focus on our clients. Benefits Risk and Financial Services Talent and Rewards towerswatson.com Copyright 213 Towers Watson. All rights reserved. TW-EU November 213. Towers Watson is represented in the UK by Towers Watson Limited and Towers Watson Capital Markets Limited.

34 Conclusion For UK motor insurers, the last few years must have felt like constantly navigating into uncharted territory. As mentioned in our introduction, and as developed in our feature articles, there seems little prospect of any immediate change in that situation thanks to a whole range of external market factors, including the continuing effects of regulation and legislation, the claims culture and the implications of Periodical Payment Orders (PPOs). However, we believe there are still opportunities for individual companies within the industry to reset their own compasses. That has to start, in many cases, with underwriting and pricing. A significant number of companies have gambled the company silver on the benefits they expect to accrue from recent legal reforms, particularly the ban on referral fees and reductions in fixed recoverable costs. By what we would consider reliable yardsticks of profitability, however, it is difficult to see how price reductions of the order of 2% in the 18 months to the end of June 213 are justified against what has happened and is happening with claims. Those analytical capabilities are increasingly likely to extend into telematics options. Our recent survey of European consumer attitudes has shown that interest in the UK is far from confined to young drivers and that many of the additional services that could be provided alongside a core insurance product appeal to many parts of the market. The recent developments in the UK motor reinsurance market, centred on the uncertainty created by PPOs, is another area where primary insurers may need to look at alternative strategies for effective risk transfer. Investment strategies that have served insurers well and typically accounting for any profits in recent years also show signs of needing adapting. All the time, firms need to be keeping a firm eye on expense ratios, which crept up in. Nevertheless, selected insurers have shown they can make headway against the tide of recent downward pricing and other pressures by being adaptable, innovative and steering a firm course through the constant wave of challenges the UK motor market continues to present. In our view, better use of data and notably external data sets in order to identify high value customers, and a focus on risk selection are vital to enable companies to separate themselves from those intent on grounding themselves on a dangerously low price heading. 34 towerswatson.com

35 Company performance Analysis of the largest companies (by net earned premium) The following graphs summarise the performance statistics of the total motor portfolio (that is, the combined operating ratio, loss ratio with prior year adjustment and expense ratio) over the account years shown with comparison to market estimates. In addition, the graphs also show the estimated market share for each company by gross written premium, ensuring consistency with earlier years where necessary. Please note, UKI figures include an adjustment for one-off restructuring costs. All data is sourced from Standard & Poor s SynThesys Non-Life Database. Copyright 213, McGraw-Hill International (UK) Limited. All rights reserved. Third Party Copyright Notice This may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poor s. Reproduction and distribution of third party content in any form is prohibited except with the prior written permission of the related third party. Third party content providers do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such content. THIRD PARTY CONTENT PROVIDERS GIVE NO EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. THIRD PARTY CONTENT PROVIDERS SHALL NOT BE LIABLE FOR ANY DIRECT, INDIRECT, INCIDENTAL, EXEMPLARY, COMPENSATORY, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES, COSTS, EXPENSES, LEGAL FEES, OR LOSSES (INCLUDING LOST INCOME OR PROFITS AND OPPORTUNITY COSTS) IN CONNECTION WITH ANY USE OF THEIR CONTENT, INCLUDING RATINGS. Credit ratings are statements of opinions and are not statements of fact or recommendations to purchase, hold or sell securities. They do not address the suitability of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice. Copyright 213, McGraw-Hill International (UK) Limited. Reproduction of SynThesys Non-Life in any form is prohibited except with the prior written permission of S&P. Because of the possibility of human or mechanical error by S&P s sources, S&P or others, S&P does not guarantee the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. S&P GIVES NO EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall S&P be liable for any indirect, special or consequential damages in connection with subscriber s or others use of SynThesys Non-Life. (213) A choppy voyage. 213 UK Motor Insurance Industry Report 35

36 Ageas Figure 22. Company performance Market share (in percent) Estimated market share Total combined operating ratio Total loss ratio Total expense ratio Market combined operating ratio Market loss ratio Market expense ratio Figure 23. Company expense Total Motor Personal Motor Commercial Motor Total Motor Personal Motor Commercial Motor towerswatson.com

37 AIG Figure 24. Company performance Market share (in percent) Estimated market share Total combined operating ratio Total loss ratio Total expense ratio Market combined operating ratio Market loss ratio Market expense ratio Figure 25. Company expense Total Motor Personal Motor Commercial Motor Total Motor Personal Motor Commercial Motor A choppy voyage. 213 UK Motor Insurance Industry Report 37

38 Aioi Figure 26. Company performance Market share (in percent) Estimated market share Total combined operating ratio Total loss ratio Total expense ratio Market combined operating ratio Market loss ratio Market expense ratio Figure 27. Company expense Total Motor Personal Motor Commercial Motor Total Motor Personal Motor Commercial Motor towerswatson.com

39 Allianz Figure 28. Company performance Market share (in percent) Estimated market share Total combined operating ratio Total loss ratio Total expense ratio Market combined operating ratio Market loss ratio Market expense ratio Figure 29. Company expense Total Motor Personal Motor Commercial Motor Total Motor Personal Motor Commercial Motor A choppy voyage. 213 UK Motor Insurance Industry Report 39

40 Aviva Figure 3. Company performance Market share (in percent) Estimated market share Total combined operating ratio Total loss ratio Total expense ratio Market combined operating ratio Market loss ratio Market expense ratio Figure 31. Company expense Total Motor Personal Motor Commercial Motor Total Motor Personal Motor Commercial Motor towerswatson.com

41 AXA Figure 32. Company performance Market share (in percent) Estimated market share Total combined operating ratio Total loss ratio Total expense ratio Market combined operating ratio Market loss ratio Market expense ratio Figure 33. Company expense Total Motor Personal Motor Commercial Motor Total Motor Personal Motor Commercial Motor A choppy voyage. 213 UK Motor Insurance Industry Report 41

42 Brit Figure 34. Company performance Market share (in percent) Estimated market share Total combined operating ratio Total loss ratio Total expense ratio Market combined operating ratio Market loss ratio Market expense ratio Figure 35. Company expense Total Motor Personal Motor Commercial Motor Total Motor Personal Motor Commercial Motor towerswatson.com

43 Chubb Figure 36. Company performance Market share (in percent) Estimated market share Total combined operating ratio Total loss ratio Total expense ratio Market combined operating ratio Market loss ratio Market expense ratio Figure 37. Company expense Total Motor Personal Motor Commercial Motor Total Motor Personal Motor Commercial Motor A choppy voyage. 213 UK Motor Insurance Industry Report 43

44 CIS Figure 38. Company performance Market share (in percent) Estimated market share Total combined operating ratio Total loss ratio Total expense ratio Market combined operating ratio Market loss ratio Market expense ratio Figure 39. Company expense Total Motor Personal Motor Commercial Motor Total Motor Personal Motor Commercial Motor towerswatson.com

45 Covéa Figure 4. Company performance Market share (in percent) Estimated market share Total combined operating ratio Total loss ratio Total expense ratio Market combined operating ratio Market loss ratio Market expense ratio Figure 41. Company expense Total Motor Personal Motor Commercial Motor Total Motor Personal Motor Commercial Motor A choppy voyage. 213 UK Motor Insurance Industry Report 45

46 Ecclesiastical Figure 42. Company performance Market share (in percent) Estimated market share Total combined operating ratio Total loss ratio Total expense ratio Market combined operating ratio Market loss ratio Market expense ratio Figure 43. Company expense Total Motor Personal Motor Commercial Motor Total Motor Personal Motor Commercial Motor towerswatson.com

47 esure Figure 44. Company performance Market share (in percent) Estimated market share Total combined operating ratio Total loss ratio Total expense ratio Market combined operating ratio Market loss ratio Market expense ratio Figure 45. Company expense Total Motor Personal Motor Commercial Motor Total Motor Personal Motor Commercial Motor A choppy voyage. 213 UK Motor Insurance Industry Report 47

48 Groupama Figure 46. Company performance Market share (in percent) Estimated market share Total combined operating ratio Total loss ratio Total expense ratio Market combined operating ratio Market loss ratio Market expense ratio Figure 47. Company expense Total Motor Personal Motor Commercial Motor Total Motor Personal Motor Commercial Motor towerswatson.com

49 Highway Figure 48. Company performance Market share (in percent) Estimated market share Total combined operating ratio Total loss ratio Total expense ratio Market combined operating ratio Market loss ratio Market expense ratio Figure 49. Company expense Total Motor Personal Motor Commercial Motor Total Motor Personal Motor Commercial Motor A choppy voyage. 213 UK Motor Insurance Industry Report 49

50 Liverpool Victoria Figure 5. Company performance Market share (in percent) Estimated market share Total combined operating ratio Total loss ratio Total expense ratio Market combined operating ratio Market loss ratio Market expense ratio Figure 51. Company expense Total Motor Personal Motor Commercial Motor Total Motor Personal Motor Commercial Motor towerswatson.com

51 NFUM Figure 52. Company performance Market share (in percent) Estimated market share Total combined operating ratio Total loss ratio Total expense ratio Market combined operating ratio Market loss ratio Market expense ratio Figure 53. Company expense Total Motor Personal Motor Commercial Motor Total Motor Personal Motor Commercial Motor A choppy voyage. 213 UK Motor Insurance Industry Report 51

52 RSA Figure 54. Company performance Market share (in percent) Estimated market share Total combined operating ratio Total loss ratio Total expense ratio Market combined operating ratio Market loss ratio Market expense ratio Figure 55. Company expense Total Motor Personal Motor Commercial Motor Total Motor Personal Motor Commercial Motor towerswatson.com

53 Sabre Figure 56. Company performance Market share (in percent) Estimated market share Total combined operating ratio Total loss ratio Total expense ratio Market combined operating ratio Market loss ratio Market expense ratio Figure 57. Company expense Total Motor Personal Motor Commercial Motor Total Motor Personal Motor Commercial Motor A choppy voyage. 213 UK Motor Insurance Industry Report 53

54 Tesco Figure 58. Company performance Market share (in percent) Estimated market share Total combined operating ratio Total loss ratio Total expense ratio Market combined operating ratio Market loss ratio Market expense ratio Figure 59. Company expense Total Motor Personal Motor Commercial Motor Total Motor Personal Motor Commercial Motor 54 towerswatson.com

55 Tradex Figure 6. Company performance Market share (in percent) Estimated market share Total combined operating ratio Total loss ratio Total expense ratio Market combined operating ratio Market loss ratio Market expense ratio Figure 61. Company expense Total Motor Personal Motor Commercial Motor Total Motor Personal Motor Commercial Motor A choppy voyage. 213 UK Motor Insurance Industry Report 55

56 Travelers Figure 62. Company performance Market share (in percent) Estimated market share Total combined operating ratio Total loss ratio Total expense ratio Market combined operating ratio Market loss ratio Market expense ratio Figure 63. Company expense Total Motor Personal Motor Commercial Motor Total Motor Personal Motor Commercial Motor towerswatson.com

57 UK Insurance Figure 64. Company performance Note: UKI figures include an adjustment for one-off restructuring costs Market share (in percent) Estimated market share Total combined operating ratio Total loss ratio Total expense ratio Market combined operating ratio Market loss ratio Market expense ratio Figure 65. Company expense Total Motor Personal Motor Commercial Motor Total Motor Personal Motor Commercial Motor A choppy voyage. 213 UK Motor Insurance Industry Report 57

58 USAA Figure 66. Company performance Market share (in percent) Estimated market share Total combined operating ratio Total loss ratio Total expense ratio Market combined operating ratio Market loss ratio Market expense ratio Figure 67. Company expense Total Motor Personal Motor Commercial Motor Total Motor Personal Motor Commercial Motor 58 towerswatson.com

59 Appendices Appendix 1 Revenue account analysis of loss, expense and combined operating ratios 6 Appendix 2 Accident year analysis 64 A choppy voyage. 213 UK Motor Insurance Industry Report 59

60 Appendix 1 Revenue account analysis of loss, expense and combined operating ratios Table definitions All figures are net of reinsurance. Personal lines includes private car and motorcycle business combined. Commercial lines includes commercial vehicle fleet and non-fleet business combined. The tables show earned premiums, expense ratios, loss ratios (incurred claims including IBNR as a percentage of earned premiums) and combined operating ratios (expense plus loss ratios). Combined operating ratios include reserve adjustments for prior accident years. All data is sourced from Standard & Poor s SynThesys Non-Life Database. Copyright 213, McGraw-Hill International (UK) Limited. All rights reserved (see page 35 for full copyright notice). 6 towerswatson.com

61 PRA form 2 expense analysis Total motor revenue year as at 31 December 211 revenue year as at 31 December 211 Index Insurer Earned Premium ( 's) Management Costs Commission / Expenses Admin Expenses Total Expense Ratio Total Loss Ratio excluding Prior Years Prior Year Effects Total Loss Ratio including Prior Years Net Operating Ratio Earned Premium ( 's) Management Costs Commission / Expenses Admin Expenses Total Expense Ratio Total Loss Ratio excluding Prior Years Prior Year Effects Total Loss Ratio including Prior Years Net Operating Ratio 1 Ageas 592, % 17.3% 1.5% 21.5% 73.4% -.7% 72.6% 94.2% 512, % 16.9%.4% 2.2% 74.8% -.5% 74.3% 94.5% 2 AIG 11,578.% 3.3% 32.6% 35.9% 157.% 11.% 168.1% 23.9% 2,378.% -16.6% 99.1% 82.5% 88.% 18.3% 16.3% 188.8% 3 Aioi 9, % 2.% 11.5% 39.3% 8.9% -6.4% 74.5% 113.8% 92, % 2.5% 13.4% 4.2% 84.7% -7.9% 76.8% 117.% 4 Allianz 534, % 14.7% 5.6% 24.4% 72.8% -8.9% 63.9% 88.3% 434, % 13.9% 6.9% 26.8% 75.5% -1.% 65.5% 92.3% 5 Aviva Ins 1,745,32 5.6% 18.9% 3.% 27.6% 75.1% -.3% 74.8% 12.4% 1,576, % 17.3% 3.4% 27.5% 74.6% 5.2% 79.8% 17.3% 6 AXA 725,11 4.5% 14.3% 7.3% 26.1% 8.7% 2.3% 82.9% 19.% 799, % 14.8% 7.3% 26.8% 82.2% 11.2% 93.4% 12.2% 7 Chubb 23, % 25.1% 16.4% 44.7% 58.% -2.9% 55.1% 99.8% 23,75 3.3% 28.7% 5.7% 37.6% 61.% 9.% 7.% 17.6% 8 CIS 45, % 9.6% 14.5% 28.9% 91.1% 9.4% 1.5% 129.4% 444,8 4.7% 9.2% 12.1% 26.1% 85.5% 5.7% 91.2% 117.3% 9 Covéa 16, % 1.2% 11.7% 21.7% 251.9%.9% 252.9% 274.5% 1 Ecclesiastical 18, % 17.3% 14.% 38.8% 96.7% -11.2% 85.5% 124.3% 16,14 7.% 18.3% 16.6% 41.9% 9.4% -18.6% 71.7% 113.6% 11 esure 378, % 11.% 9.% 23.6% 89.2% -15.6% 73.7% 97.2% 37, % 9.4% 12.2% 26.2% 83.7% -11.6% 72.% 98.2% 12 Groupama 192,56 4.5% 17.7% 5.7% 27.9% 77.7% 6.9% 84.6% 112.5% 194, % 17.8% 6.2% 28.8% 76.1% -2.2% 73.9% 12.7% 13 Highway 347, % 14.4% 9.% 25.8% 77.2%.5% 77.7% 13.5% 389, % 13.6% 5.9% 22.9% 75.5% -.2% 75.4% 98.3% 14 Liverpool Victoria 853, % 11.5% 12.5% 27.6% 73.9% 2.5% 76.5% 14.1% 75,86 3.3% 12.1% 14.5% 29.9% 67.8% 1.4% 69.2% 99.1% 15 MMA 6, % 15.1% 8.% 3.5% 7.2% -6.3% 63.9% 94.4% 16 NFUM 512, % 13.% 7.1% 26.1% 73.1% -3.1% 7.% 96.1% 477, % 14.% 6.2% 24.% 88.9% -19.5% 69.4% 93.4% Provident 136,21 6.4%.6% 11.1% 18.1% 76.6% 11.2% 87.9% 16.% RSA 1,73,616 6.% 16.4% 2.5% 24.9% 82.% -1.% 81.% 16.% 1,164,87 4.5% 14.7% 1.4% 2.7% 84.1% 5.2% 89.3% 11.% Sabre 152, % 13.5% 1.4% 18.1% 59.%.% 58.9% 77.% 157, % 12.8% 1.9% 18.3% 59.8% 5.6% 65.4% 83.7% 2 Tesco 539, % 13.3% 4.5% 2.4% 84.% -1.8% 82.2% 12.7% 322, % 7.5% 5.2% 19.2% 85.1%.1% 85.2% 14.4% 21 Tradex 26, % 7.1%.% 15.3% 54.6% 35.5% 9.1% 15.4% 22, % -13.2%.% -1.8% 65.7% 22.6% 88.3% 86.5% 22 Travelers 27, % 13.3% 36.2% 51.9% 78.9% 1.4% 8.3% 132.2% 53, % 13.% 31.8% 49.2% 8.7% 1.7% 91.4% 14.6% 23 UKI 1,644,47 1.1% 8.9% 21.5% 4.6% 82.5% -18.2% 64.3% 14.9% 1,979, % 9.9% 12.4% 32.1% 87.3% -8.7% 78.7% 11.8% 24 USAA 41, %.% 17.% 24.5% 75.4% -5.3% 7.1% 94.6% 4, %.% 22.5% 34.8% 71.7% -.1% 71.6% 16.5% 25 Other 4, % 31.8% 94.3% 145.5% 58.% % % % 47,851 3.% 28.7% 11.7% 43.4% 79.8% -84.2% -4.4% 39.% 26 Total incl other 1,32, % 13.9% 9.% 28.4% 79.4% -3.7% 75.7% 14.1% 1,42,73 5.9% 13.1% 7.8% 26.8% 8.2% -1.% 79.2% 16.% 27 Total excl other 1,27,57 5.4% 13.9% 9.% 28.3% 79.4% -3.5% 75.9% 14.2% 9,994, % 13.1% 7.8% 26.7% 8.2% -.6% 79.6% 16.3% 28 Total restricted 9,784, % 14.% 8.6% 28.% 78.7% -3.6% 75.% 13.% 9,85, % 13.% 7.4% 26.3% 8.2% -.7% 79.5% 15.8% 29 Aviva total 1,745,32 5.6% 18.9% 3.% 27.6% 75.1% -.4% 74.7% 12.3% 1,576, % 17.3% 3.4% 27.5% 74.6% 5.4% 8.% 17.5% "Total restricted" excludes Aioi, AIG, Chubb, Travelers and "Other". "Aviva total" includes Aviva insurance, Aviva international, Aviva UK and Gresham (which is included in "Other" in the main list). Covéa has been removed from all "Total" statistics UKI figures include an adjustment for one-off restructuring costs A choppy voyage. 213 UK Motor Insurance Industry Report 61

62 PRA form 2 expense analysis Personal lines motor revenue year as at 31 December 211 revenue year as at 31 December 211 Index Insurer Earned Premium ( 's) Management Costs Commission / Expenses Admin Expenses Total Expense Ratio Total Loss Ratio excluding Prior Years Prior Year Effects Total Loss Ratio including Prior Years Net Operating Ratio Earned Premium ( 's) Management Costs Commission / Expenses Admin Expenses Total Expense Ratio Total Loss Ratio excluding Prior Years Prior Year Effects Total Loss Ratio including Prior Years Net Operating Ratio 1 Ageas 49, % 16.7% 1.4% 21.1% 73.8% -1.2% 72.6% 93.6% 435,914 3.% 16.5%.2% 19.7% 74.5% -.9% 73.6% 93.3% 2 3 AIG Europe 65,178.% 9.8% 17.5% 27.3% 18.% 1.% 181.% 28.3% 12,787.% 14.4% 21.2% 35.6% 85.8% 34.2% 12.% 155.6% Aioi 88, % 21.2% 1.7% 39.4% 8.8% -6.1% 74.8% 114.1% 9, % 21.4% 12.4% 4.% 84.2% -9.4% 74.8% 114.8% 4 Allianz 219, % 17.8% 7.3% 29.3% 78.3% -9.1% 69.2% 98.5% 16,64 6.9% 16.8% 11.5% 35.3% 81.% -1.1% 7.9% 16.2% 5 Aviva Ins 1,2, % 17.7% 2.% 25.2% 74.6% -.1% 74.5% 99.6% 1,16,47 6.8% 17.2% 2.7% 26.7% 74.7% 3.6% 78.3% 15.% 6 AXA 52, % 13.4% 6.6% 24.2% 84.2%.5% 84.7% 18.9% 69,83 4.% 14.5% 6.% 24.5% 84.7% 11.8% 96.6% 121.% 7 Chubb 22, % 23.9% 14.6% 41.% 56.1% -12.2% 44.% 84.9% 2, % 27.9% 5.1% 35.2% 56.7% -7.1% 49.6% 84.8% 8 CIS 386, % 9.7% 14.5% 29.% 9.8% 11.6% 12.4% 131.4% 424,37 4.6% 9.4% 12.1% 26.1% 85.1% 5.5% 9.6% 116.7% 9 Covéa 77, % -4.1% 12.6% 18.8% 37.4% -2.9% 34.5% 323.3% 1 Ecclesiastical.%.%.%.%.%.%.%.%.%.%.%.%.%.%.%.% esure 378, % 11.% 9.% 23.6% 89.2% -15.6% 73.7% 97.2% 37, % 9.4% 12.2% 26.2% 83.7% -11.6% 72.% 98.2% Groupama 148,33 4.4% 18.1% 5.4% 27.9% 71.7% 8.8% 8.5% 18.3% 145,77 4.7% 18.6% 5.9% 29.2% 73.9% -5.5% 68.4% 97.6% Highway 198, % 14.4% 9.% 26.5% 73.3% 3.5% 76.9% 13.3% 233, % 13.7% 5.8% 23.4% 71.% -.9% 7.2% 93.6% Liverpool Victoria 835, % 11.5% 12.6% 27.7% 74.1% 2.6% 76.7% 14.4% 71,19 3.4% 12.1% 14.3% 29.8% 67.8% 1.4% 69.2% 98.9% 15 MMA 39, % 13.7% 7.7% 28.8% 7.3% -9.7% 6.6% 89.4% 16 NFUM 226, % 13.% 7.3% 26.6% 63.8% -2.6% 61.2% 87.7% 223,88 3.6% 14.% 6.5% 24.2% 85.1% -16.5% 68.5% 92.7% Provident 119,26 6.7%.6% 11.5% 18.7% 74.5% 11.1% 85.6% 14.4% RSA 534, % 21.5% 4.6% 33.3% 7.9% -.3% 7.6% 13.9% 655,33 5.6% 19.4% 2.3% 27.3% 76.2% 8.1% 84.2% 111.5% Sabre 136, % 13.5% 1.4% 17.9% 59.9%.% 59.9% 77.9% 144, % 13.% 1.9% 18.5% 6.3% 5.7% 66.% 84.5% 2 Tesco 539, % 13.3% 4.5% 2.4% 84.% -1.8% 82.2% 12.7% 322, % 7.5% 5.2% 19.2% 85.1%.1% 85.2% 14.4% 21 Tradex 2,12 6.3% 8.3%.% 14.7% 5.7% 45.8% 96.6% 111.2% 1,78 8.7% -16.9%.% -8.2% 51.6% 17.2% 68.9% 6.7% 22 Travelers 6, % 12.7% 39.4% 55.3% 72.8% 52.8% 125.6% 18.9% 31, % 12.% 35.9% 52.7% 75.8% 15.3% 91.1% 143.7% 23 UKI 1,55, % 8.4% 22.1% 4.9% 82.5% -15.6% 66.9% 17.8% 1,882,36 9.8% 9.4% 12.4% 31.7% 86.8% -1.1% 76.7% 18.4% 24 USAA 41, %.% 17.% 24.5% 75.4% -5.3% 7.1% 94.6% 4, %.% 22.5% 34.8% 71.7% -.1% 71.6% 16.5% 25 Other 2, % 56.9% 95.8% 191.6% 43.% % -41.8% -21.2% 1, % 38.7% 15.4% 67.5% 92.8% % -1.8% -33.2% 26 Total incl other 7,576, % 13.6% 9.9% 29.1% 79.1% -3.6% 75.5% 14.6% 7,691, % 13.% 8.3% 27.5% 79.5% -1.4% 78.1% 15.5% 27 Total excl other 7,574, % 13.6% 9.8% 29.1% 79.1% -3.5% 75.6% 14.7% 7,681, % 13.% 8.3% 27.4% 79.5% -1.2% 78.3% 15.7% 28 Total restricted 7,391,87 5.7% 13.5% 9.7% 28.9% 78.2% -3.5% 74.7% 13.6% 7,526,83 6.2% 12.8% 8.1% 27.1% 79.5% -1.2% 78.3% 15.4% 29 Aviva total 1,2, % 17.7% 2.% 25.2% 74.6% -.3% 74.3% 99.5% 1,16,47 6.8% 17.2% 2.7% 26.7% 74.7% 3.8% 78.5% 15.2% "Total restricted" excludes Aioi, AIG, Chubb, Travelers and "Other". "Aviva total" includes Aviva insurance, Aviva international, Aviva UK and Gresham (which is included in "Other" in the main list). Covéa has been removed from all "Total" statistics UKI figures include an adjustment for one-off restructuring costs 62 towerswatson.com

63 PRA form 2 expense analysis Commercial lines motor revenue year as at 31 December 211 revenue year as at 31 December 211 Index Insurer Earned Premium ( 's) Management Costs Commission / Expenses Admin Expenses Total Expense Ratio Total Loss Ratio excluding Prior Years Prior Year Effects Total Loss Ratio including Prior Years Net Operating Ratio Earned Premium ( 's) Management Costs Commission / Expenses Admin Expenses Total Expense Ratio Total Loss Ratio excluding Prior Years Prior Year Effects Total Loss Ratio including Prior Years Net Operating Ratio 1 Ageas 11, % 19.9% 1.9% 23.9% 71.3% 1.6% 72.9% 96.8% 76,528 2.% 19.7% 1.1% 22.8% 76.8% 1.8% 78.6% 11.4% 2 AIG Europe 36,4.% -8.3% 59.5% 51.2% 115.9% 29.% 144.8% 196.1% 7,591.% -68.9% 23.3% 161.4% 91.7% -8.5% 83.2% 244.6% 3 Aioi 2, % -27.1% 44.4% 34.8% 84.7% -2.1% 64.6% 99.4% 1, % -37.2% 76.% 53.% 116.4% 83.3% 199.7% 252.7% 4 Allianz 314,691 4.% 12.6% 4.4% 21.% 68.9% -8.8% 6.1% 81.1% 274, % 12.2% 4.2% 21.8% 72.3% -9.9% 62.4% 84.2% 5 Aviva Ins 544, % 21.6% 5.3% 32.8% 76.4% -.8% 75.6% 18.4% 56, % 17.5% 4.9% 29.% 74.5% 8.2% 82.7% 111.7% 6 AXA 222, % 16.3% 8.9% 3.3% 72.8% 6.3% 79.1% 19.4% 189, % 15.9% 11.7% 34.1% 73.8% 9.4% 83.2% 117.4% 7 Chubb % 63.8% 73.7% 165.5% 119.% 295.3% 414.3% 579.8% 3, % 33.4% 9.4% 53.5% 88.6% 113.4% 22.% 255.6% 8 CIS 18, % 7.8% 14.6% 26.6% 95.8% -35.1% 6.7% 87.3% 19, % 6.% 13.1% 25.9% 94.5% 9.3% 13.8% 129.7% 9 Covéa 28, % 15.8% 9.% 29.5% 12.1% 11.2% 113.3% 142.8% 1 Ecclesiastical 18, % 17.3% 14.% 38.8% 96.7% -11.2% 85.5% 124.3% 16,14 7.% 18.3% 16.6% 41.9% 9.4% -18.6% 71.7% 113.6% 11 esure.%.%.%.%.%.%.%.%.%.%.%.%.%.%.%.% 12 Groupama 44, % 16.5% 6.6% 28.% 97.9%.4% 98.3% 126.4% 49, % 15.6% 6.9% 27.5% 82.5% 7.5% 9.1% 117.6% 13 Highway 148, % 14.4% 9.% 24.9% 82.4% -3.6% 78.8% 13.7% 155, % 13.5% 6.2% 22.2% 82.3%.9% 83.2% 15.4% 14 Liverpool Victoria 17,793.% 13.4% 1.6% 24.% 66.6% -.6% 66.% 9.% 4,751.% 17.1% 31.3% 48.4% 67.6%.% 67.6% 116.% 15 MMA 2, % 17.6% 8.6% 33.9% 69.9%.1% 7.1% 14.% 16 NFUM 286, % 13.1% 7.% 25.7% 8.5% -3.4% 77.% 12.8% 253, % 14.1% 5.9% 23.9% 92.3% -22.2% 7.1% 94.% Provident 16, %.5% 8.4% 13.4% 92.% 11.8% 13.9% 117.3% RSA 539,7 4.7% 11.4%.5% 16.7% 93.1% -1.7% 91.4% 18.1% 58, % 8.7%.3% 12.2% 94.4% 1.4% 95.8% 18.% Sabre 16, % 13.5% 1.4% 19.% 51.1% -.6% 5.5% 69.5% 13, % 1.% 1.9% 16.5% 55.% 4.2% 59.2% 75.7% 2 Tesco.%.%.%.%.%.%.%.%.%.%.%.%.%.%.%.% 21 Tradex 24, % 7.1%.% 15.4% 54.9% 34.7% 89.6% 15.% 2, % -12.9%.% -1.3% 66.9% 23.% 89.9% 88.7% 22 Travelers 21, % 13.5% 35.3% 51.% 8.6% -13.3% 67.3% 118.3% 22,9 3.6% 14.5% 26.1% 44.2% 87.6% 4.3% 91.9% 136.1% 23 UKI 93,97 3.8% 18.5% 12.4% 34.7% 82.3% -6.8% 21.5% 56.2% 97,85 8.8% 2.4% 12.2% 41.3% 97.2% 19.3% 116.5% 157.8% 24 USAA.%.%.%.%.%.%.%.%.%.%.%.%.%.%.%.% 25 Other 2, % 9.% 93.1% 13.6% 71.6% -277.% -25.5% -11.9% 37,247.1% 25.8% 1.6% 36.5% 76.2% -53.1% 23.1% 59.6% 26 Total incl other 2,455, % 15.1% 6.3% 26.% 8.5% -3.9% 76.6% 12.6% 2,35,84 4.9% 13.6% 6.% 24.6% 82.5%.2% 82.7% 17.4% 27 Total excl other 2,453, % 15.1% 6.2% 26.% 8.5% -3.6% 76.9% 12.8% 2,313,557 5.% 13.4% 6.% 24.4% 82.6% 1.1% 83.7% 18.1% 28 Total restricted 2,392, % 15.5% 5.1% 25.3% 79.9% -4.1% 75.8% 11.2% 2,279,285 5.% 13.7% 5.% 23.7% 82.5%.9% 83.4% 17.1% 29 Aviva total 544, % 21.6% 5.3% 32.8% 76.4% -.8% 75.6% 18.4% 56, % 17.5% 4.9% 29.% 74.5% 8.2% 82.7% 111.7% "Total restricted" excludes Aioi, AIG, Chubb, Travelers and "Other". "Aviva total" includes Aviva insurance, Aviva international, Aviva UK and Gresham (which is included in "Other" in the main list). Covéa has been removed from all "Total" statistics UKI figures include an adjustment for one-off restructuring costs A choppy voyage. 213 UK Motor Insurance Industry Report 63

64 Appendix 2 PRA accident year analysis Table definitions All figures are gross of reinsurance. The tables show detailed results for: Private car comprehensive Private car non-comprehensive Motorcycle Commercial vehicle non-fleet Commercial vehicle fleet Commercial vehicle other All data is sourced from Standard & Poor s SynThesys Non-Life Database. Copyright 213, McGraw-Hill International (UK) Limited. All rights reserved (see page 35 for full copyright notice). 64 towerswatson.com

65 PRA form 32 analysis Private car comprehensive, accident year versus 211 accident year Index Insurer Earned Premiums ( 's) 211 Earned Premiums ( 's) Vehicle Year Exposure ('s) 211 Vehicle Year Exposure ('s) Change in Vehicle Year Exposure Average Earned Premium 211 Average Earned Premium Change in Average Earned Loss 211 Loss Premium Ratio Ratio Change in Ultimate Loss Claim 211 Claim Ratio Frequency Frequency Change in Claim Frequency Ultimate Burning Cost 211 Ultimate Burning Cost Change in Ultimate Burning Cost Paid to Incurred 211 Paid to Incurred 1 Ageas 57, ,32 1,568 1, % % 72.2% 74.6% -2.4% 9.8% 1.8% -1.1% % 43.7% 43.6% 2 AIG Europe.% N/A.%.% N/A.%.% N/A N/A.%.% 3 Allianz 221,27 16, % % 76.9% 78.4% -1.4% 13.4% 12.3% 1.1% % 49.6% 43.8% 4 Aioi 1,944 18, % % 258.9% 68.2% 19.7%.% 14.% N/A % 36.4% 58.8% 5 Aviva Ins 1,158,968 1,4,531 2,514 2, % % 71.8% 7.4% 1.4% 13.5% 13.1%.4% % 47.8% 4.8% 6 AXA 47, ,986 1,357 1, % % 85.4% 85.2%.2% 15.3% 1.7% 4.7% % 36.4% 37.1% 7 Chubb.% N/A.%.% N/A.%.% N/A N/A.%.% 8 CIS 396, , % % 89.6% 83.9% 5.7% 13.2% 14.5% -1.4% % 34.8% 34.9% 9 Covéa 94, % 17.2% 1, % 1 Ecclesiastical.% N/A.%.% N/A.%.% N/A N/A.%.% 11 esure 44, ,23 1,235 1, % % 93.5% 86.7% 6.7% 1.9% 11.5% -.6% % 4.2% 39.5% 12 Groupama 113, , % % 71.% 75.2% -4.2% 8.9% 11.% -2.1% % 39.6% 38.4% 13 Highway 13, , % % 73.2% 66.9% 6.3% 12.5% 14.6% -2.1% % 38.2% 43.3% 14 Liverpool Victoria 833, ,549 2,423 2,5 2.8% % 73.4% 67.6% 5.8% 12.% 13.5% -1.5% % 43.3% 47.8% 15 MMA 41, % 9.2% % 16 NFUM 26,247 24, % % 82.4% 88.9% -6.4% 1.1% 1.8% -.7% % 35.3% 4.4% 17 Provident 145, % 11.7% % RSA 414,592 48, , % % 7.4% 72.8% -2.4% 12.2% 13.9% -1.7% % 49.7% 52.6% Sabre 87,127 89, % % 67.% 56.% 11.% 11.6% 12.% -.3% % 29.% 3.5% 2 Tesco 53,629 31,412 1, % % 85.% 85.5% -.4% 14.8% 16.9% -2.1% % 4.5% 36.4% 21 Tradex 6,483 6, % % 53.8% 49.6% 4.2% 8.8% 1.3% -1.5% % 5.6% 5.8% 22 Travelers.% N/A.%.% N/A.%.% N/A N/A.%.% 23 UKI 1,536,865 1,824,433 3,716 4, % % 95.1% 97.3% -2.3% 14.5% 12.% 2.5% % 35.5% 34.6% 24 USAA 4,113 4, % % 42.2% 43.7% -1.5% 15.4% 14.5%.9% % 88.4% 8.8% 25 Other 2,53 13, % % 92.2% 64.2% 28.% 8.% 33.% -25.% % 45.9% 38.9% 26 Total incl other 7,36,815 7,94,26 17,371 17,64-1.5% % 81.9% 81.6%.3% 12.8% 12.5%.3% % 4.6% 39.3% 27 Total excl other 7,34,312 7,8,881 17,357 17, % % 81.9% 81.6%.3% 12.9% 12.5%.3% % 4.5% 39.3% 28 Total restricted 7,23,368 7,62,131 17,297 17, % % 81.6% 81.6% -.1% 12.9% 12.5%.4% % 4.6% 39.3% "Total restricted" excludes Aioi, AIG, Chubb, Travelers and "Other". Covéa has been removed from all "Total" statistics A choppy voyage. 213 UK Motor Insurance Industry Report 65

66 PRA form 32 analysis Private car non-comprehensive, accident year versus 211 accident year Index Insurer Earned Premiums ( 's) 211 Earned Premiums ( 's) Vehicle Year Exposure ('s) 211 Vehicle Year Exposure ('s) Change in Vehicle Year Exposure Average Earned Premium 211 Average Earned Premium Change in Average Earned Loss 211 Loss Premium Ratio Ratio Change in Ultimate Loss Claim 211 Claim Ratio Frequency Frequency Change in Claim Frequency Ultimate Burning Cost 211 Ultimate Burning Cost Change in Ultimate Burning Cost Paid to Incurred 211 Paid to Incurred 1 Ageas 6, % 37 N/A.% 97.1% N/A.% 6.5% N/A 36 N/A.% 29.7% 2 AIG Europe.% N/A.%.% N/A.%.% N/A N/A.%.% 3 Allianz.% N/A.%.% N/A.%.% N/A N/A.%.% 4 Aioi.% N/A.%.% N/A.%.% N/A N/A.%.% 5 Aviva Ins 28,759 18, % % 16.6% 159.4% -52.8% 11.6% 15.2% -3.6% % 33.% 33.9% 6 AXA 32,266 53, % % 53.8% 78.6% -24.8% 5.7% 8.4% -2.7% % 34.8% 21.9% 7 Chubb.% N/A.%.% N/A.%.% N/A N/A.%.% 8 CIS % 387 N/A 181.8% 38.2% 143.6%.% 3.5% N/A 148 N/A 62.5% 56.1% 9 Covéa 6, % 43.1% 7, % 1 Ecclesiastical.% N/A.%.% N/A.%.% N/A N/A.%.% 11 esure % 412 N/A 45.3% 68.1% -22.8%.% 3.2% N/A 281 N/A 21.8% 3.7% 12 Groupama 11,123 1, % % 72.9% 84.4% -11.5% 4.7% 6.9% -2.2% % 29.8% 22.8% 13 Highway 52,792 67, % % 81.1% 63.7% 17.4% 6.1% 6.5% -.4% % 27.3% 36.4% 14 Liverpool Victoria 11,653 8, % % 17.5% 84.9% 22.6% 9.8% 7.1% 2.7% % 31.3% 35.5% 15 MMA.%.%.% 16 NFUM.% N/A.%.% N/A.%.% N/A N/A.%.% 17 Provident 33, % 4.7% % 18 RSA.% N/A.%.% N/A.%.% N/A N/A.%.% 19 Sabre 46,773 62, % % 78.9% 66.1% 12.9% 6.3% 7.9% -1.6% % 2.4% 19.6% 2 Tesco 26,987 22, % % 61.6% 75.6% -13.9% 4.4% 1.3% -5.9% % 34.9% 24.1% 21 Tradex 1, % % 44.4% 42.5% 1.8% 5.8% 8.5% -2.8% % 33.2% 24.6% 22 Travelers.% N/A.%.% N/A.%.% N/A N/A.%.% 23 UKI 62,21 95, % % 71.2% 7.6%.7% 2.% 1.6%.5% % 3.1% 29.1% 24 USAA 5,431 5, % % 228.6% 73.6% 155.% 3.2% 3.1%.1% 1, % 11.1% 31.1% 25 Other % % 99.5% 16.5% -6.9% 1.5% 25.1% -14.6% % 46.1% 19.5% 26 Total incl other 279, , , % % 79.6% 74.9% 4.8% 4.4% 4.7% -.3% % 28.1% 28.2% 27 Total excl other 279, , , % % 79.6% 74.8% 4.8% 4.4% 4.7% -.3% % 28.1% 28.3% 28 Total restricted 279, , , % % 79.6% 74.8% 4.8% 4.4% 4.7% -.3% % 28.1% 28.3% "Total restricted" excludes Aioi, AIG, Chubb, Travelers and "Other". Covéa has been removed from all "Total" statistics 66 towerswatson.com

67 PRA form 32 analysis Motorcycle, accident year versus 211 accident year Index Insurer Earned Premiums ( 's) 211 Earned Premiums ( 's) Vehicle Year Exposure ('s) 211 Vehicle Year Exposure ('s) Change in Vehicle Year Exposure Average Earned Premium 211 Average Earned Premium Change in Average Earned Loss 211 Loss Premium Ratio Ratio Change in Ultimate Loss Claim 211 Claim Ratio Frequency Frequency Change in Claim Frequency Ultimate Burning Cost 211 Ultimate Burning Cost Change in Ultimate Burning Cost Paid to Incurred 211 Paid to Incurred 1 Ageas.% N/A.%.% N/A.%.% N/A N/A.%.% 2 AIG Europe.% N/A.%.% N/A.%.% N/A N/A.%.% 3 Aioi.% N/A.%.% N/A.%.% N/A N/A.%.% 4 Allianz.% N/A.%.% N/A.%.% N/A N/A.%.% 5 Aviva Ins.% N/A.%.% N/A.%.% N/A N/A.%.% 6 AXA.% N/A.%.% N/A.%.% N/A N/A.%.% 7 Chubb.% N/A.%.% N/A.%.% N/A N/A.%.% 8 CIS.% N/A.%.% N/A.%.% N/A N/A.%.% 9 Covéa.%.%.% 1 Ecclesiastical.% N/A.%.% N/A.%.% N/A N/A.%.% 11 esure.% N/A.%.% N/A.%.% N/A N/A.%.% 12 Groupama 26, % 226 N/A 78.9%.% N/A 4.1%.% N/A 178 N/A 37.7%.% 13 Highway 15,522 11, % % 75.2% 177.1% -11.9% 4.7% 5.7% -1.% % 31.4% 15.6% 14 Liverpool Victoria.% N/A.%.% N/A.%.% N/A N/A.%.% 15 MMA.%.%.% 16 NFUM.% N/A.%.% N/A.%.% N/A N/A.%.% Provident.%.% 15.6% RSA.% N/A.%.% N/A.%.% N/A N/A.%.% Sabre.% N/A.%.% N/A.%.% N/A N/A.%.% 2 Tesco.% N/A.%.% N/A.%.% N/A N/A.%.% 21 Tradex % N/A 59.8% 5.9% 8.9%.%.% N/A N/A 19.7% 48.1% 22 Travelers.% N/A.%.% N/A.%.% N/A N/A.%.% 23 UKI.% N/A.%.% N/A.%.% N/A N/A.%.% 24 USAA % N/A 12.1% 24.7% %.%.% N/A N/A 91.2% 22.6% 25 Other 3 4.% N/A.% 5.% N/A.%.% N/A N/A.% 5.% 26 Total incl other 42,173 11, % % 77.6% 176.7% -99.1% 4.4% 5.9% -1.5% % 35.7% 15.8% 27 Total excl other 42,17 11, % % 77.6% 176.7% -99.1% 4.4% 5.9% -1.5% % 35.7% 15.8% 28 Total restricted 42,17 11, % % 77.6% 176.7% -99.1% 4.4% 5.9% -1.5% % 35.7% 15.8% "Total restricted" excludes Aioi, AIG, Chubb, Travelers and "Other". A choppy voyage. 213 UK Motor Insurance Industry Report 67

68 PRA form 32 analysis Commercial vehicle non-fleet, accident year versus 211 accident year Index Insurer Earned Premiums ( 's) 211 Earned Premiums ( 's) Vehicle Year Exposure ('s) 211 Vehicle Year Exposure ('s) Change in Vehicle Year Exposure Average Earned Premium 211 Average Earned Premium Change in Average Earned Loss 211 Loss Premium Ratio Ratio Change in Ultimate Loss Claim 211 Claim Ratio Frequency Frequency Change in Claim Frequency Ultimate Burning Cost 211 Ultimate Burning Cost Change in Ultimate Burning Cost Paid to Incurred 211 Paid to Incurred 1 Ageas 74,81 57, % % 65.% 73.1% -8.1% 11.6% 11.5%.1% % 39.9% 36.3% 2 AIG Europe 6,363 32, % 1, % 137.3% 19.% -52.7% 91.% 47.% 44.% 2,22 1, % 26.5% 25.6% 3 Aioi.% N/A.%.% N/A.%.% N/A N/A.%.% 4 Allianz 47,955 29, % % 64.1% 69.% -4.8% 16.5% 18.5% -2.% % 44.9% 42.5% 5 Aviva Ins 81,15 15, % % 53.7% 63.2% -9.5% 8.9% 6.8% 2.% % 45.3% 55.4% 6 AXA.% N/A.%.% N/A.%.% N/A N/A.%.% 7 Chubb.% N/A.%.% N/A.%.% N/A N/A.%.% 8 CIS 19,199 2, % % 93.9% 93.1%.7% 17.8% 19.2% -1.4% % 29.8% 28.1% 9 Covéa 9, % 36.1% 1, % 1 Ecclesiastical.% N/A.%.% N/A.%.% N/A N/A.%.% 11 esure.% N/A.%.% N/A.%.% N/A N/A.%.% 12 Groupama 1,964 8, % % 72.8% 73.6% -.8% 11.% 14.8% -3.7% % 38.2% 4.6% 13 Highway 9,682 94, % % 73.1% 69.9% 3.2% 14.9% 16.3% -1.4% % 34.% 37.% 14 Liverpool Victoria.% N/A.%.% N/A.%.% N/A N/A.%.% 15 MMA.%.%.% 16 NFUM 148,15 132, % % 74.8% 84.4% -9.5% 14.2% 14.4% -.2% % 37.5% 38.2% 17 Provident.%.%.% 18 RSA 71,73 86, % % 74.% 95.7% -21.7% 16.4% 16.%.4% % 37.1% 4.6% 19 Sabre.% N/A.%.% N/A.%.% N/A N/A.%.% 2 Tesco.% N/A.%.% N/A.%.% N/A N/A.%.% 21 Tradex 1,896 1, % 1, % 48.7% 54.7% -6.% 24.% 18.8% 5.2% % 34.% 38.5% 22 Travelers 16,912 17,157.% N/A 81.9% 92.8% -1.9%.%.% N/A N/A 22.1% 22.% 23 UKI 18,417 53, % % 268.3% 124.2% 144.1% 21.4% 12.6% 8.8% 1, % 22.% 23.7% 24 USAA.% N/A.%.% N/A.%.% N/A N/A.%.% 25 Other 1,963 1, % % 69.8% 4.8% 29.% 8.5% 8.6% -.1% % 57.6% 61.9% 26 Total incl other 643, ,9 1,23 1,1-7.% % 81.9% 87.4% -5.5% 16.9% 15.% 1.9% % 34.5% 36.6% 27 Total excl other 641, ,19 1,15 1,92-7.1% % 82.% 87.6% -5.6% 17.% 15.1% 1.9% % 34.5% 36.6% 28 Total restricted 564,17 589, ,4-6.3% % 76.% 81.7% -5.7% 13.7% 13.3%.4% % 36.4% 38.5% "Total restricted" excludes Aioi, AIG, Chubb, Travelers and "Other". Covéa has been removed from all "Total" statistics 68 towerswatson.com

69 PRA form 32 analysis Commercial vehicle fleet, accident year versus 211 accident year Index Insurer Earned Premiums ( 's) 211 Earned Premiums ( 's) Vehicle Year Exposure ('s) 211 Vehicle Year Exposure ('s) Change in Vehicle Year Exposure Average Earned Premium 211 Average Earned Premium Change in Average Earned Loss 211 Loss Premium Ratio Ratio Change in Ultimate Loss Claim 211 Claim Ratio Frequency Frequency Change in Claim Frequency Ultimate Burning Cost 211 Ultimate Burning Cost Change in Ultimate Burning Cost Paid to Incurred 211 Paid to Incurred 1 Ageas.% N/A.%.% N/A.%.% N/A N/A.%.% 2 AIG Europe.% N/A.%.% N/A.%.% N/A N/A.%.% 3 Aioi 778 1, % % 275.1% 435.6% -16.5%.% 32.1% N/A 713 2, % 44.3% 8.5% 4 Allianz 279, , % % 68.5% 71.5% -3.% 18.3% 19.8% -1.5% % 51.3% 47.4% 5 Aviva Ins 383, , % % 79.5% 77.8% 1.8% 21.5% 17.9% 3.6% % 39.% 52.2% 6 AXA 148, , % % 77.2% 76.6%.6% 17.4% 3.2% -12.8% % 43.3% 43.9% 7 Chubb.% N/A.%.% N/A.%.% N/A N/A.%.% 9 8 CIS.% N/A.%.% N/A.%.% N/A N/A.%.% Covéa.%.%.% 1 Ecclesiastical 1,32 9, % % 112.5% 95.9% 16.6% 18.% 17.1%.9% % 33.9% 41.6% 11 esure.% N/A.%.% N/A.%.% N/A N/A.%.% 12 Groupama 27,861 35, % % 114.% 82.6% 31.5% 13.4% 19.6% -6.2% % 33.6% 41.% 13 Highway 54,483 51, % % 1.8% 72.3% 28.5% 19.5% 2.7% -1.2% % 3.8% 43.6% 14 Liverpool Victoria.% N/A.%.% N/A.%.% N/A N/A.%.% 15 MMA.%.%.% 16 NFUM.% N/A.%.% N/A.%.% N/A N/A.%.% 17 Provident.%.%.% 18 RSA 475,76 424, % % 98.3% 96.9% 1.4% 27.5% 3.6% -3.1% % 51.4% 52.4% 19 Sabre.% N/A.%.% N/A.%.% N/A N/A.%.% 2 Tesco.% N/A.%.% N/A.%.% N/A N/A.%.% 21 Tradex 18,5 16, % 1,542 1, % 61.4% 68.9% -7.5% 22.4% 23.7% -1.3% % 31.6% 31.5% 22 Travelers.% N/A.%.% N/A.%.% N/A N/A.%.% 23 UKI 49,47 46, % 3,81 3, % 76.5% 8.6% -4.2% 88.5% 98.6% -1.1% 2,96 2,877 1.% 38.1% 4.4% 24 USAA.% N/A.%.% N/A.%.% N/A N/A.%.% 25 Other 5,959 62, % % 87.% 74.1% 12.9% 9.9% 13.4% -3.5% % 51.3% 48.1% 26 Total incl other 1,455,189 1,388,25 2,19 2,15.2% % 84.8% 82.6% 2.1% 23.% 24.8% -1.8% % 45.4% 49.2% 27 Total excl other 1,449,23 1,325,757 2, 1, % % 84.8% 83.% 1.7% 23.1% 25.3% -2.3% % 45.4% 49.2% 28 Total restricted 1,448,452 1,324,224 1,997 1, % % 84.7% 82.6% 2.% 23.1% 25.3% -2.2% % 45.4% 49.5% "Total restricted" excludes Aioi, AIG, Chubb, Travelers and "Other". A choppy voyage. 213 UK Motor Insurance Industry Report 69

70 PRA form 32 analysis Commercial vehicle other, accident year versus 211 accident year Index Insurer Earned Premiums ( 's) 211 Earned Premiums ( 's) Vehicle Year Exposure ('s) 211 Vehicle Year Exposure ('s) Change in Vehicle Year Exposure Average Earned Premium 211 Average Earned Premium Change in Average Earned Loss 211 Loss Premium Ratio Ratio Change in Ultimate Loss Claim 211 Claim Ratio Frequency Frequency Change in Claim Frequency Ultimate Burning Cost 211 Ultimate Burning Cost Change in Ultimate Burning Cost Paid to Incurred 211 Paid to Incurred 1 Ageas.% N/A.%.% N/A.%.% N/A N/A.%.% 2 AIG Europe.% N/A.%.% N/A.%.% N/A N/A.%.% 3 Aioi % % 429.4% 85.7% 343.7%.% 11.8% N/A % 24.9% 53.4% 4 Allianz.% N/A.%.% N/A.%.% N/A N/A.%.% 5 Aviva Ins 88,97 97, % % 7.7% 7.9% -.2% 17.% 2.9% -3.9% % 31.5% 32.7% 6 AXA.% N/A.%.% N/A.%.% N/A N/A.%.% 7 Chubb.% N/A.%.% N/A.%.% N/A N/A.%.% 8 CIS.% N/A.%.% N/A.%.% N/A N/A.%.% 9 1 Covéa 19, % 4.3% % Ecclesiastical.% N/A.%.% N/A.%.% N/A N/A.%.% 11 esure.% N/A.%.% N/A.%.% N/A N/A.%.% 12 Groupama.% N/A.%.% N/A.%.% N/A N/A.%.% 13 Highway 5,117 9, % 1, % 158.5% 26.2% -11.7% 24.5% 3.8% 2.7% 1, % 31.% 13.3% 14 Liverpool Victoria 17,995 4, % 1,5 1, % 65.9% 66.7% -.8% 29.6% 21.9% 7.7% % 35.8% 19.6% 15 MMA 15, % 4.9% % 16 NFUM 12,177 86, % % 79.5% 97.5% -17.9% 5.% 5.3% -.3% % 53.6% 5.3% 17 Provident 2, % 11.1% % 18 RSA.% N/A.%.% N/A.%.% N/A N/A.%.% 19 Sabre 16,587 14, % % 47.3% 51.3% -4.% 8.9% 9.6% -.6% % 37.6% 3.4% 2 Tesco.% N/A.%.% N/A.%.% N/A N/A.%.% 21 Tradex 73,932 69, % % 54.% 61.1% -7.1% 9.6% 11.9% -2.3% % 32.8% 35.5% 22 Travelers.% N/A.%.% N/A.%.% N/A N/A.%.% 23 UKI.% N/A.%.% N/A.%.% N/A N/A.%.% 24 USAA.% N/A.%.% N/A.%.% N/A N/A.%.% 25 Other % % 16.7% 24.9% -8.2% 1.5% 5.% -3.5% % 35.7% 45.2% 26 Total incl other 34,19 32, % % 69.7% 81.1% -11.4% 8.9% 8.9%.1% % 4.6% 36.3% 27 Total excl other 34,16 32, % % 69.8% 81.2% -11.4% 9.% 8.9%.1% % 4.6% 36.3% 28 Total restricted 33,95 32, % % 69.5% 81.2% -11.6% 9.% 8.9%.1% % 4.7% 36.2% "Total restricted" excludes Aioi, AIG, Chubb, Travelers and "Other". Covéa has been removed from all "Total" statistics 7 towerswatson.com

71 How can Towers Watson help? At Towers Watson we continue to identify and bring profit-enhancing innovations to the highly competitive UK motor insurance market. Along with the threats that a challenging and shifting business environment bring, there are still significant opportunities available. Across the UK motor sector as a whole, our track record in advanced pricing techniques, in-depth reserving analysis and capital modelling, and in the provision of software is unmatched. One of the biggest opportunities for the UK motor sector lies in telematics. Here, we are supporting firms with broad consultancy, data management and analytical services, to enable them to develop appropriate strategies and to provide practical solutions for the broad range of technical, process and management issues that are involved in bringing a telematics product to market successfully. Our detailed knowledge and understanding of the sector allows us to additionally deliver sound and trusted management and actuarial consultancy in a range of broader areas including: merger and acquisition advice, capital management, pricing effectiveness, underwriting and portfolio management, expense reduction, distribution analytics, management information and efficiency of asset strategy. For further information or to discuss the analysis contained in this report, please contact: Duncan Anderson [email protected] Anju Bell [email protected] Graham Fulcher [email protected] Stephen Jones [email protected] Karl Murphy [email protected] David Ovenden [email protected] This report was current as of October 213. We have used reasonable endeavours to ensure that the information in the report is correct and we have sourced information from various third parties that we have not always been able to verify. We cannot be responsible for any inaccuracies in the report and the information in this publication is intended to be only for general interest and guidance. Decisions should not be made based on any information in this report without seeking specific advice. A choppy voyage. 213 UK Motor Insurance Industry Report 71

72 Software portfolio Towers Watson provides sophisticated risk, analytics and consulting solutions that help P&C and life insurers meet the rapidly evolving demands of today s market. Towers Watson s software offerings provide a truly comprehensive portfolio of analytical software. We combine innovative actuarial thinking with software expertise to develop comprehensive solutions that measure value, manage risk and safeguard solvency. Pricing software Our software tools enable you to plan, manage and optimise your pricing process, and to deliver rates. Used independently or with our consultancy services, these tools are powerful additions to your business. Financial modelling software Clients in more than 3 countries leading P&C and life insurance companies, multinationals, pension funds, mutual funds and asset managers use our systems for enhanced risk and capital management. Towers Watson Emblem Towers Watson Classifier Towers Watson Igloo Towers Watson ResQ Towers Watson Radar Base Towers Watson Radar Dashboard Towers Watson MoSes Towers Watson RiskAgility Towers Watson Radar Optimiser Towers Watson Radar Live Towers Watson RiskAgility EC Towers Watson Replica Standard Formula These additions to our established capital modelling solutions aim to simplify the challenges of calculating the Solvency II Standard Formula SCR for life, P&C and composite insurers. Towers Watson RiskAgility SF Towers Watson Igloo SF For more information, contact your local Towers Watson office or us at [email protected] Towers Watson is represented in the UK by Towers Watson Limited and Towers Watson Capital Markets Limited. The information in this publication is of general interest and guidance. Action should not be taken on the basis of any article without seeking specific advice. To unsubscribe, [email protected] with the publication name as the subject and include your name, title and company address. About Towers Watson Towers Watson is a leading global professional services company that helps organisations improve performance through effective people, risk and financial management. With 14, associates around the world, we offer solutions in the areas of benefits, talent management, rewards, and risk and capital management. Copyright 213 Towers Watson. All rights reserved. TW-EU November 213. towerswatson.com