- 5 years of Solvency II (“SII”) reporting allows a focussed look at gross, ceded and net underwriting performance by line.
- Using SII data from A.M. Best*, Litmus Analysis has developed a UK Market Motor cohort of insurers** in order to review carrier specific underwriting performance covering around 98% of UK motor GWP.
- At the gross loss ratio level Acromas (Saga’s insurer) and Sabre outperform the cohort mean by a very substantial 18 to 19 points.
- The carriers’ results are even better vs the cohort at the net loss ratio level, where they are joined as very noteworthy outperformers by Admiral’s largest carrier (Gibraltar).
- This continues into the net combined ratio, though an accounting treatment issue around intra-group profit payments makes Admiral Gibraltar’s GAAP account combined ratio outcome a lot worse than its SII number (we suspect the latter is the more representative).
- UK insurance (Direct Line’s carrier) is third on a gross loss ratio and fifth on a net basis, but a relatively high expense ratio drags the net combined ratio down to be 2 points worse than the cohort mean.
Litmus Analysis research on Solvency II (“SII”) performance data* shows UK insurers Acromas (Saga) and Sabre comfortably beating all other members of our standard UK & Gibraltar domiciled motor market cohort** for gross underwriting performance, with 5-year average gross loss ratios (5-yr. GLRs) of 52.5% and 53.4% respectively.
Gross underwriting performance gives a fundamental perspective on the quality and volatility of an insurer’s book but is rarely commented on (in part because the required data is often not publicly available). Data required to be published under SII regulations, however, allows this on both a whole account and a by-line basis.
Both carriers have also proven to be very effective users of the motor reinsurance markets. Sabre’s 5-year net loss ratio (5-yr. NLR) drops to an exceptional 45% despite a quite modest reinsurance spend, Acromas’ net ratio to minus (yes, minus)28%. On this net basis Admiral’s major, Gibraltar-based, carrier also delivers a stand-out result with a 5-yr. NLR of 33%.
Nor does the SII expense base treatment of the three carriers trip them up – they also top the charts for the 5-year average combined ratios (5-yr. CRs), though for Admiral Gibraltar comparing its combined ratio derived from SII and GAAP data respectively shows a dramatic difference, with the GAAP outcome being 32% worse at 91%. Essentially, this is down to a difference in the treatment of payments of large profit commissions to other group companies.
Acromas’ non-motor business drags its overall results down but its whole account 5-yr. CR is still a pretty remarkable 33%.
The gross loss ratio story
UK TOP 3 MOTOR GROSS LOSS RATIO PERFORMANCE RANKINGS
Acromas and Sabre level GLRs are not unheard of among small, niche players, but become very challenging to deliver with greater premium volume as the opportunities to risk select to this apparent degree reduce. However, both carriers had gross written motor premiums in 2020 north of €180 m and so are achieving this at some significant business scale.
The underwriting opportunities that can come from smaller books even within larger insurance groups are highlighted by two UK books too small to make our cohort (below €50 m GWP)**: Motors Insurance delivered a 5-yr. GLR of 39.4% (€10 m of 2020 motor GWP), Hiscox’s UK carrier came in with a 48% GLR average (€24 m of 2020 motor GWP).
UK motor market behemoth UK Insurance (Direct Line) performs very creditably to come in third with a 5-yr. GLR of 61%, while writing €1.9 bn, as do the two Admiral carriers in our cohort at 62% and 64%. The total cohort 5-yr. GLR median and mean both being in the low 70% range.
The after-reinsurance story
UK TOP 3 MOTOR NET LOSS RATIO PERFORMANCE RANKINGS
A gross loss ratio represents a ‘pure’ view of an underwriting book – while subject to the judgment vagaries of loss picks (reserve setting), it is unaffected by a carrier’s outwards reinsurance protection.
Over time reinsurers will expect to make a healthy return from cedants, but how that is achieved varies by both the type of cover purchased and a reinsurer’s own underwriting portfolio management.
Comparing UK Insurance (third place in the 5-yr. GLR table but fifth on the NLR basis) with Admiral Gibraltar (by far the larger of the two Admiral carriers in our cohort) highlights the potential impact of reinsurance. UK Insurance gives up a couple of points in its 5-yr. NLR vs the GLR (as would be economically what one would commonly expect – assuming it is paying to reduce volatility), but Admiral Gibraltar gains a whopping 31%, reducing a 64% 5-yr. GLR to an NLR of 33%.
Acromas and Admiral Gibraltar both cede a lot of their book (retention percentages in the mid-20’s). In essence they are very substantially using their reinsurers’ capital to write the gross volumes that they do.
Sabre, by contrast, retains over 90% of gross premium. We presume its protection buying focus is in handling the potential volatility from catastrophe losses and liability exposures.
The ceded loss ratios (“CLRs”) shown above describe the underwriting result a carrier’s reinsurer(s) are, in the aggregate, achieving. The closer the CLR is to the GLR and the lower the cedant’s retention rate, the more the cedant/reinsurer relationship appears to reflect the sharing of loss frequency. Higher differences and retentions suggest the cedant is primarily buying protection against loss severity.
The underwriting bottom line
UK TOP 3 MOTOR COMBINED RATIO PERFORMANCE RANKINGS
(Net) combined ratios are, of course, the most commonly used reference point for underwriting performance, reflecting the actual underwriting profit or loss the insurer is booking for its retained account.
It is here we see the impact of the insurer’s (net) underwriting and distribution cost base on the net loss ratio.
Acromas, Admiral Gibraltar and Sabre continue to lead the rankings.
Admiral Gibraltar’s SII 5-year combined ratio is profoundly better than its GAAP financial statements outcome due too large profit participation payments made to sister group companies (£148.4 m in 2019 – we don’t yet have access to the 2020 GAAP accounts). These are treated as an underwriting expense within the GAAP accounts but not within the SII numbers. At first sight, since the SII expense ratio looks to be roughly in the range one would expect for a fully loaded (net) underwriting and distribution cost structure, our best guess is that the Solvency 2 number is probably the more valid perspective.
The 2017 and 2019 Ogden discount rate changes are naturally reflected in the data. The degree of the 2017 rate reduction was a nasty surprise to most insurers, so required reserve increases would be expected to mainly show up in the GLRs, CLRs and NLRs for that year (although, since at least some reduction was expected, some carriers may have reserved for part of this in 2016).
Conversely 2019’s increase led logically to performance gains from reduced loss reserve requirements, but the degree of increase was deemed disappointing and some market participants will have taken more reserve credit when setting their reserves for future claims in their 2018 accounts than actually transpired (requiring a partial roll back of the gain in their 2019 numbers).
*About the data
All the underlying data used in our analysis was sourced from A.M. Best’s data services under Litmus Analysis’ license with them.
**The standard Litmus UK Motor Market Cohort
A challenge with relative underwriting performance analyses of this type is that unrepresentative, case-specific situations can distort the outcome. A simple example is loss portfolio transfers and how these are accounted for. Carriers with smaller books and/or very low retentions can also show unusual performance profiles.
Accordingly, we have created our cohort as a subset of all carriers reporting UK motor business and domiciled in either the UK or Gibraltar. 26 carriers are included representing 98% of gross written premiums.
For more details on the cohort make-up, carrier exclusion criteria or to discuss any other aspect of our analysis of the UK motor market please feel very free to contact us directly at email@example.com
Stuart Shipperlee, October 2021