Has inflation been a ‘helpful correction’ for the UK motor sector?

Recent figures for the motor insurance sector do not paint a pretty picture for consumers, with the average price of premiums set to keep on rising.

For example, the latest Car Insurance Price Index from Confused.com and Willis Towers Watson (WTW), revealed that average premiums rose by 18% (£119) in Q2 2023, the fastest quarterly rise it recorded since 2010.

Published earlier this year (20 July 2023), the data also revealed that comprehensive car insurance premiums had risen by 40% in the last year, with motorists now paying £776 on average.

However, an examination of insurers’ H1 2023 results revealed a common denominator that had affected prices – inflation.

Inflation started to bite in 2022 and was exacerbated by the conflict in Ukraine and knock-on effects on energy markets.

And back in January 2023, figures from the Office for National Statistics (ONS) showed UK inflation sat at 10.1%, as measured by the Consumer Price Index (CPI).

In turn, this caused prices to rise, with central banks having to raise interest rates to decrease consumer demand in an attempt to control inflation.

“The UK motor market is very competitive and prices are going up everywhere at the moment and, unfortunately, insurance is no different,” a spokesperson from LV= General Insurance told Insurance Times.

“Factors affecting premiums include a 30% increase in used car prices, which has raised the cost of a total loss or stolen vehicle, and the cost of courtesy cars when a customer needs a replacement vehicle, which is 30% more expensive.

”And with new high-tech vehicles being equipped with sensors, cameras and high voltage systems, these are raising the cost of replacement parts and also require specialist labour to fit.

“Paint prices also went up 20% in 2022 and most claims require paint work. All of these factors mean that the cost of insurance has increased.”

’Helpful correction’

When Admiral released its results earlier this month (16 August 2023), the insurer said that “persistent high inflation continued across markets [and] remained higher than the market had anticipated”.

And on the same day, Colm Holmes, chief executive of Allianz Holdings, told Insurance Times that the insurer saw “inflation running at 11% in personal lines motor for the first half of the year and over 10% in the fleet business”.

However, there could be light at the end of the tunnel, with inflation having recently started to fall.

According to the ONS’ latest CPI, published on 16 August 2023, the measure of inflation fell to 6.8% in July, down from 7.9% in June.

Markerstudy’s underwriting director Gary Humphreys said that, as inflation starts to fall, consumers will eventually see price changes hitting the market.

“The rate of increases has definitely slowed down,” he told Insurance Times.

And he added that the market ”almost needed an inflationary event to get it back to adequate pricing levels”.

Asked why an economic factor like inflation would have helped the motor sector, Humphreys said that it served as a “helpful correction”.

“It needed an extraneous event to enforce the market as a whole to increase prices because it was bubbling along at sub-optimal loss ratios,” he explained.

“So, the only way to get a market correction is when there is something outside of the market’s control, like extreme inflation.”

Stability

While inflation has started to fall, it has not stopped insurers from making big decisions.

For example, earlier this year (28 March 2023), RSA Insurance announced it would exit the UK personal lines motor market after conducting a “thorough review” of its business.

Just over three months later (13 July 2023), Zurich UK revealed plans to refocus its personal lines home and motor business to concentrate on the high net worth (HNW) market and proposed to withdraw from the regional and national broker channels.

Humphreys said that capacity in the market was “restricting”, which could in turn result in exits from some smaller insurers.

However, he added that if pricing discipline was maintained and the hard market continued into next year, ”then we might see some of the bigger reinsurance markets providing capacity and coming back into UK motor”.

But, he added that when there is more stability and inflation is under control, insurers should not rush into offering lower premiums.

“The excessive inflation has led to extreme price increases, but it’s important than when inflation is under control and prices start to come down, there is not a headlong rush into low premiums and writing volume at unprofitable levels,” he said.

”This is because it could startup the cycle again of people exiting the market.

”[However], more stability can be expected, which is good for the long-term prospects of the UK motor market.”