Briefing: Could government intervention create a rocky road for motor insurers?

By deputy editor Yiannis Kotoulas

For someone that writes about the UK general insurance sector, a significant portion of my friends and family seem to think that I am in charge of the price of motor insurance. 

I’m sure this is the case for many readers, but the most common refrain I hear from those outside the industry is thus: “My car insurance is way too expensive.” 

This has always been a widespread opinion and, with an election coming up on 4 July, politicians have latched on to the issue.

Whether you think they are motivated by a genuine desire to serve the public or by a more cynical desire to win votes is by the by – motor insurance is in for a reckoning. 

Prices out of control?

Last week (5 June 2024), Labour’s shadow transport secretary Louise Haigh said that her party would call on regulators to investigate “out of control” motor premiums and clamp down on “any unfair practices” within the sector.

But are prices actually out of control? Well, it would certainly look like it to the average consumer. 

The latest ABI data on motor premiums – the only organisation that records prices paid rather than simply quoted – from the end of April noted that while increases had slowed at the start of 2024, prices did rise by 25% across 2023. 

This was significant and generated a fair amount of column inches in the national press. But, as the ABI explained: “Over the long term, motor insurance has tracked very close to inflation.

“In real terms, prices are just £8 more when compared to the previous peak at the end of 2017.” 

So it may not be that motor policies are any more unaffordable – but simply that they are perceived to be because there’s a higher number on the bill. 

Indeed, specialist motor insurer Sabre’s chief executive Geoff Carter explained: ”Insurance premiums are no less affordable than they were in 2018, it’s just that all that [price] increase has come [mostly] in one year, rather than steadily across the period.

“It was not a good thing for the industry to hold prices back – it’s been good for the customer for four years or so because premiums weren’t going up, but then the cork had to come out the bottle at some point.” 

And despite all of that, the costs insurers pay back to customers in claims has actually increased in real terms. According to the ABI’s tracking, claims costs for insurers have risen by 27% in real terms since the end of 2017. 

Political solutions

As the above may suggest, not a lot of motor insurers are raking in profit – Insurance DataLab analysis of Solvency and Financial Condition Reports (SFCRs) in November 2023 found an average combined operating ratio (COR) of 111.1% for motor insurers across the UK and Gibraltar.

Because of this, it seems clear that a new government would not have any success pursuing a policy that would make providing motor insurance any more costly.

It would be useful, however, if a potential new government were able to work on what was driving premium increases by tackling the root cause. 

Carter added: “The industry would be more than happy to talk about what’s driving premium up, which is the cost labour, cost of parts, technology in cars and the move to EVs.

”The industry would all be in favour of working on how to reduce claims costs – that will bring premiums down.” 

So what might a likely Labour government’s policies look like here? Haigh didn’t initially expand on her comments, but yesterday (12 June 2024) Labour announced a plan to tackle potholes across the country, which could bring down premiums. 

Safer roads do equal fewer claims, do equal cheaper insurance, as policyholders in Wales’ 20 mph speed limit zones may soon find out. 

A strategic, government-led, top-down plan to reduce claims costs for insurers could only be a good thing for both policyholders and insurers themselves.

James Daley, managing director at Fairer Finance, told Insurance Times: ”We’re going to have to find ways of unlocking some savings to support people who are really struggling, but rely on their cars.”

It is true that, for those who rely on their cars to get to work or earn a living, mandatory insurance is a cost they could do without. 

And in a line as competitive as motor, there are also bound to be inefficiencies that could be addressed to bring down costs for everyone. 

However, as Daley notes: “It’s basically impossible for [insurers] to sort this out on their own, so it would need regulatory intervention. 

“There’s a whole list of possible solutions and we need to understand the benefits and consequences of all of those, because there’s trade-offs whatever you do – someone’s got to pay for it, whether it’s better-off consumers, taxpayers or the industry. 

“Change always has consequences.”