Motor market grew GWP by 25% in 2023 – Oxbow Partners

EXCLUSIVE: Average gross written premium (GWP) in the UK motor insurance market grew by 25% in 2023, reaching “a level not seen in recent memory” as insurers grappled with the ramifications of claims inflation.

This is according to the latest edition of business management consultancy Oxbow Partners’ Motor Market Report 2024, which is due to be published tomorrow (23 May 2024).

The annual report is based on individual company data for 19 of the largest insurers in the market, external market data from sources such as the ABI and Office for National Statistics, as well as interviews with market participants.

This year’s report has predicted that the UK motor market will experience a boost in profitability to reach £1.25bn GWP – this is nearly a five-fold increase over 2023.

This is based on “record price increases” over the last year – GWP in the UK motor market grew 25% in 2023, well ahead of Oxbow Partners’ initial 16% prediction noted in last year’s report.

This premium uptick led to a resultant 12% increase in earned premiums for 2023 – once again higher than Oxbow Partners’ original 10% estimation.

The report attributed these figures to “claims inflation that was higher and maintained for longer than we had expected” as well as “a withdrawal of capacity in the market as some players gave up volume in return for better profitability and others exited the market entirely”.

The consultancy therefore expects the UK motor market to achieve a combined operating ratio (COR) of 94% in 2024, with this “rising to 95% in 2025 as volume targets come back into the minds of executives and shareholders causing rates to fall again”.

Speaking exclusively to Insurance Times, Paul De’Ath – the report’s author and Oxbow Partners’ head of market intelligence – said: “2022 and 2023 were years of significant claims inflation going through the market.

“The market didn’t put through any price increases in 2022, which meant that in 2023, the market then had to put through significant price increases to try and offset both what they should have put through in 2022 and what they needed to put through in 2023.

“The price increases that we saw in 2023 were higher than we expected.”

He added that Oxbow Partners believed earned premiums would increase “significantly this year, which should make the whole market much more profitable”.

For him, this is because the motor market had already experienced “years of pain” and 2024 should, therefore, be “a year where the market makes more money” as earned premiums cycle into insurers’ financials.

Claims inflation

Claims inflation has been a key driver of premium price in the UK motor market across recent years, De’Ath emphasised.

He explained that during the Covid-19 pandemic period, premiums in this marketplace were much lower than the Consumer Price Index (CPI) suggested.

The CPI uses the prices of a fixed set of goods and services to measure inflation.

De’Ath observed that motor premiums still have not caught up with CPI, so although prices are ramping up, this is “a necessary change”.

He explained: “At points, [premium increases seemed] excessive [but] it was a necessary change to try and make up for the claims inflation that had been going through.

“We’re now in a place where, broadly [speaking], the market is pricing much more effectively for costs they have to suffer and so we expect that in 2024, rates will still go up, but they won’t go up by nearly as much.”

Oxbow Partners’ report stated: “In 2024, we expect the market to continue to increase written prices, slightly ahead of underlying claims inflation of 6%.

“Several key factors will impact this, including the Supreme Court multi-injury judgment, whiplash tariffs and Ogden rate change.”

Although De’Ath referenced that the report predicted a “push for volume” at some point in 2024 to 2025 – which might drive price cuts – he added that a “recency bias” and general feelings of “nervousness” around previously high inflation rates may rein in this tactic and help ensure more rational pricing for longer.

Premium finance

Oxbow Partners’ report additionally discussed premium finance and the FCA’s potential focus on this financial tool.

The report stated: “With its strategic objectives focused primarily on championing consumer interests, we believe that the FCA will take aim at premium finance regardless of the economic situation.

“In an April Treasury Select Committee investigating insurance premiums, including car insurance, the FCA’s head of insurance stated that [it was] increasing scrutiny of add-ons including premium finance.

“We envisage the FCA taking action against the worst offenders on annual percentage rates (APRs) late in 2024.

“By making an example of some, other players will reduce APRs marginally to avoid being hit if action is taken later.”

For De’Ath, action around premium finance is tricky. Although it is a product that has caught the FCA’s eye, “the issue is that [premium finance] is something that customers value quite a lot” – especially bearing in mind the increase in premium prices, De’Ath explained.

He continued: “There’s a general view that the FCA doesn’t want to make a big move. At one extreme, [the FCA could] say that [firms] can’t charge extra for monthly [payments] at all, or [it] could bring in a cap at a certain APR.

“My impression is that [the FCA does not] want to do that and [it] would rather [that] the market self-regulated. Ultimately, the market would rather self-regulate than have the FCA get involved as well.

“Our view is that the APRs on premium finance will come down naturally because the market will try and reduce them to show willing.

“If that [does not move] fast enough, then the FCA might pick out some of the outliers and do something against individual companies [that] are charging significantly more than everybody else.

“[This] would also act to move everyone [else’s APR] down a bit. It’s reasonable that there is a charge for premium finance – it’s then just a question of how much that charge is.”

De’Ath added that if the FCA opted to take a very strict approach to premium finance, then market participants may decide not to offer it.

In turn, this could have ramifications regarding Consumer Duty by preventing customers from getting a positive outcome if they cannot pay for cover in a way which works best for them financially.