Motor insurers are being heavily criticised by British politicians and consumer organisations. The complaints vary, but there’s a common theme: premiums are rising steeply, that is unacceptable and it’s got to stop. As if to underline this, on 15 February 2012, David Cameron, the British Prime Minister, hosted an “insurance summit” with insurance, consumer and business groups to discuss ways of bringing premiums down.

Rising premiums have been blamed on referral fees, fraudulent and exaggerated personal injury claims, and Britain’s “blame and claim” culture. The debate is generating a lot of heat. It’s also diverting attention from the fundamentals.

Most consumers buy their car insurance on price. Competition is fierce and premiums have been pushed down hard. As a result, for almost two decades, British insurers have tended to effect their motor policies at a loss, before trying to make a profit on their investments and ancillary insurance products. That worked well enough when times were good. But it’s much harder to do these things today. Little wonder, then, that insurance premiums are rising.

If anything, legal and regulatory changes mean this trend will continue over the medium term.

For technical reasons, the Test-Achats decision, which makes it unlawful for European insurers to offer different premiums and benefits to men and woman, is expected to push up premiums for women without generating a corresponding reduction for men (see our previous blog post here).

Solvency II is also expected to drive premium increases. There are two reasons: it will raise insurers’ capital requirements, making it more expensive to effect and carry out contracts of insurance than before. If that happens, some or all of these costs will have to be passed on to consumers.  Solvency II’s “all risks” and “full balance sheet” approach to valuing assets, liabilities and risks is also expected to highlight just how expensive and loss making effecting and carrying out motor insurance policies can be. These changes will force some insurers to close their loss making books and could generate further consolidation in the sector.

Let us hope these fundamentals reassert themselves quickly, and a more balanced debate can begin.