The challenging UK motor market almost broke even last year, figures from Ernst & Young show – but a softening in rates means the improvement will not last.

The sector’s combined operating ratio moved to 102% from 120% in 2010, mainly due to hardening rates, the accountancy group says.

But profitability may have peaked, with more competitive pricing creeping in.

“These early results show the market has turned too soon, well before many players have managed to break even,” Financial Services Partner Catherine Barton said.

New legislation on legal aid and sentencing of offenders will have a “neutral at best” impact on claims costs, Ernst & Young says.

“Reductions in market prices may mean insurers have chosen to see these reforms through rose-tinted glasses and are hoping the effect will be positive,” Ms Barton said.

The European Union’s gender directive, which means gender can no longer be used as a differential when underwriting motor risk, has not seen prices harden, she says.

“Even in the unlikely event that both these changes do spell good news, insurers are taking credit too early, which leaves the potential for things to go wrong.”