The £493 million ($960 million) underwriting loss reported for last year by the UK private motor insurance industry is more like £1 billion ($1.95 billion), a new report from consultants Watson Wyatt says.

The report notes insurers have disguised losses by offsetting them with reserve releases from previous years.

According to the report, last year’s result was slightly better than the 2007 underwriting loss of more than £1.1 billion ($2.14 billion), and represents a break in a continuous trend of losses which started in 2004 – the only profitable year in the past decade, when the market made a profit of £77 million ($150 million).

Watson Wyatt senior consultant Ryan Warren says last year’s improvement can be attributed to fewer claims, a slight increase in rates and restructuring of reinsurance programs, although many insurers still struggled to break even.

He expects the industry to be profitable next year when projected underwriting losses fall from the current 15% of earned premiums to 6% – with a 2% annual return on capital, after allowing for investment returns.

However the report warns that despite a likely improvement in profitability, significant “headwinds” remain. These include greater competition fuelled by increasing price transparency, more third-party bodily injury claims, recession-driven fraudulent claims, the greater likelihood of periodic payments and the move towards higher excess policies which reduce average premiums.