The troubled UK motor insurance market could rebound as much as 20% this year after a string of shocking results.

A new report by Ernst & Young – Bringing Profitability Back From The Brink Of Extinction – has predicted improved fortunes for the retail motor insurance market on the back of premium increases and greater control of claims costs.

The long-awaited rebound follows several years of poor results. In 2009/10, the market lost around £5 billion ($7.71 billion) and in 2010, the loss ratio for UK motor insurance blew out to nearly 121%.

The personal motor insurance market in the UK is enormous, with £9.5 billion ($14.65 billion) in premiums written in 2009. However, the potential revenue has attracted many players which operate on very tight margins.

IAG, the fifth largest provider of motor insurance in the UK, lost another $121 million in the first half of this financial year and one of its companies, Equity Red Star, is reportedly up for sale.

Ernst & Young actuary Catherine Barton says insurers were caught “in a perfect storm in 2009 and 2010” as personal injury claims rose and competition undermined margins.

Personal injury costs constituted only 33% of the market 10 years ago but have now grown to 75%.

“We suspect that bodily injury inflation will continue to be a problem but insurers now appear to be more focused on the risks,” Ms Barton said. “We expect to see a much improved performance in 2011 and 2012.”

The report says other shifts in the market will fundamentally change the motor insurance landscape, especially the rise of the “aggregator channel” or online comparison site.

“Patterns of distribution will continue to shift and we expect the dominance of the aggregator channel to reach around 49% of the total book by 2014.”