Motor insurance pricing cycle ‘close to a point of softening’

The motor industry has experienced tough market conditions in recent years and with pressures from surging claims and material costs, regulatory change and inflation, it has been difficult to balance financial gain with meeting evolving consumer needs for some insurers.

Speaking exclusively to Insurance Times, Pearson Ham Group director Stephen Kennedy revealed that the pricing cycle in UK motor insurance was now “close to a point of softening” and, although expected this year, may occur “earlier than originally anticipated” by market participants.

He added that reports of softening may be music to some firms’ ears, the pricing cycle change will not benefit all insurers because “while some providers feel they have increased premiums enough to meet the increased costs, others will still be struggling with profitability”.

“It’s certainly going to be an interesting market for the next few months.”

According to Pearson Ham’s Quarterly Q4 Insurance Price Index, published in January 2024, motor insurance prices reflected an average increase of 47% throughout 2023 and, in the final quarter of the year, premium inflation continued to slow down with a month-on-month reduction observed in December for the first time since April 2022.

The index stated premiums in Q4, for example, saw an overall growth of 3.1%, compared to a 16% rise in Q3 and 14% increase in Q2.

And over the past six months, prices rose by 20% – as opposed to 33% in the prior half year.

The data was based on insurance quotes obtained through the four big comparison websites on behalf of a rotating panel of consumers. Pearson Ham said that rotating the panel, in addition to conducting data cleansing, ensured “accuracy”.

Kennedy explained: “So far in January [2024] we are seeing further reductions for some providers – these are fairly significant coming in at -3 or -5%.

”However, we are still seeing premiums increasing for other providers at similar magnitude.”

Data differences

Lifting the lid on what was driving motor premium rises, the Association of British Insurers (ABI) said in November last year that motor insurance payouts by insurers increased by 21% in Q3 2023 – equating to £4,821 paid out every minute – compared to the £2.1bn paid in Q3 2022.

The 570,000 claims settled in that same period also rose in value by 5%.

Vehicle repair claims costs jumped by 32% to a quarterly record of £1.6bn in Q3 2022 and some insurers reported further Q3 increases of 16% for materials, 15% for labour and 46% for other costs – largely driven by the price of energy.

AutoTrader Group’s Retail Price Index February 2023, published in March last year, further highlighted that longer repair times drove up the cost of providing replacement vehicles by 47% in Q3 2023 compared to Q3 2022.

In terms of insurance pricing, however, the ABI’s Motor Insurance Premium Tracker, published on 31 January 2024, told a slightly different story.

The tracker analyses nearly 28 million policies sold a year and its findings were based on the prices customers paid for their cover rather than what they were quoted.

Data from the tracker highlighted that motor premiums in Q4 2023 were up 12% compared to Q3 – meaning that cover was 25% more expensive on average across the whole of 2023 than in 2022.

The ABI stated: “Data from price comparison site indices produce higher averages than price data because they are typically based on an average of multiple quotes and comparison sites attract a cross section of drivers not typical of the wider UK average”.

Billion-pound claim payout

Echoing Kennedy’s sentiments, the ABI’s manager for general insurance policy Jonathon Fong told Insurance Times that “like most other sectors, insurers are facing rising costs that they are finding increasingly challenging to absorb”.

“Motor insurance payouts increased every quarter of 2023, consistently beating previous records to be the highest quarterly payouts since we started collecting data back in 2013,” he added.

“Driven by increases in the price of materials, labour and energy, the cost of vehicle repairs has risen sharply, as well as that of providing replacement cars due to longer average repair times.

“In both Q2 and Q3 of 2023, insurers paid out over £2.5 billion in claims.”

From an insurer’s perspective, Allianz Personal’s managing director of retail Henry Topham said: “We know it is incredibly tough for consumers at the moment and we’re doing everything we can to try and keep our costs down, but prices have inevitably been impacted because of inflation.

“The motor industry will undoubtedly continue to experience tough market conditions and inflationary pressures into 2024, but we’re working with our suppliers to tackle shortages of key materials and look for new sources – including green parts for cars.

“We’re [also] expanding our engineering team to speed up repairs and get customers back on the road quickly, as well as expanding our own network of body repair shops to maintain control of costs.”

Appeal to government

To help settle claims faster, accident management services Winn Group chief executive Chris Birkett suggested that a “positive step insurers can take is to enter into a protocol claims agreement” – these arrangements also “help insurers reduce claims costs significantly because it removes the need for litigation”, so “it’s a win-win solution”, he added.

Birkett flagged, however, that “even when the numbers presented to insurers make a compelling case for entering into a protocol arrangement and their claims staff agree with the logic, insurers at c-suite level have vetoed the idea”.

Considering pricing, Fong said that “rising repair costs and other factors outside of insurers’ control mean there is no single action that could bring down premiums”.

The ABI is therefore working with its members to “understand what actions can be taken to help motorists manage costs”.

“Through our Consumer Advisory Group – attended by leading consumer associations – and our Consumer Committee, we are working with representatives from across the sector to discuss what more can be done by industry, regulators and the government to help bring costs down,” he added.

“We have also repeatedly said the government could help drivers with an immediate reduction in costs by reducing Insurance Premium Tax (IPT).

“IPT at its current rate of 12% currently adds an extra £67 to the average motor insurance premium.”