The UK Government can reduce claims costs to lower motor insurance prices, according to industry experts. The Labour Party, which polls indicate is win the general election, has pledged to support drivers by addressing the rising cost of car insurance.

Labour MP Louise Haigh, the shadow transport minister, told The Mirror that the Financial Conduct Authority and the Competition and Markets Authority should investigate the industry, according to S&P Global report.

One potential action for the new government is raising the personal injury discount rate for car insurance, known as the Ogden rate, suggested Graeme Trudgill, CEO of the British Insurance Brokers’ Association.

This rate — which the Lord Chancellor, a senior member of the government’s cabinet, sets in England and Wales — determines how much insurers can adjust payments to severely injured claimants to account for the returns claimants make from investing their payouts.

Difference the car insurance rate

Difference the car insurance rate

The discount rate has been in negative figures since 2017, partly because of low interest rates at the time, meaning insurers must pay out more than awarded rather than less. The discount rate is currently set at negative 0.25% in England and Wales, negative 0.75% in Scotland and negative 1.5% in Northern Ireland.

The difference the auto insurance rate makes to claims is “absolutely enormous” and can be in the millions of pounds for the more serious claims. A review is scheduled for 2024, and the Ministry of Justice is working on the process but it needs to be prioritized. There has to be a change there if they want a change in premiums.

Another area for attention could be the conduct of business rules for claims management companies. There was no requirement to try keep costs to a sensible, fair level.

The statistics from the Association of British Insurers showing that vehicle repair costs increased by 31% and the cost of providing temporary replacement vehicles increased 35% in 2023 compared with 2022.

In a car accident, the not-at-fault driver’s insurer pays the claims and then seeks reimbursement from the at-fault driver’s insurer. In these situations, the not-at-fault driver’s insurer tends to be more lenient with claims cost controls compared to when they cover the costs themselves. Insurers are aware of the issues with this practice but continue it to remain competitive.

Rising motor insurance prices and decreasing insurers profits

Rising motor insurance prices and decreasing insurers profits

The average price for comprehensive personal motor insurance reached £995 in Q4 2023, a 58% increase from £629 in the same quarter of 2022, according to the WTW/Confused price index.

The increase resulted from higher claims costs due to rising prices for energy, labor, vehicle parts, and second-hand cars, driven by economic inflation and supply chain issues partially caused by the Russia-Ukraine war.

Higher claims costs have also impacted insurers’ motor underwriting profits. Data from the Bank of England shows that UK insurers’ combined ratio for motor liability and other motor lines exceeded the 100% break-even point in every quarter of 2022 and 2023, indicating underwriting losses.

The significant price increase in 2023 occurred despite rising claims costs in 2022. The Financial Conduct Authority’s new general insurance pricing rules, which prohibited insurers from offering lower prices to new customers while raising them for renewing customers, contributed to this trend.

The Association of British Insurers declined to comment on political parties’ manifesto pledges on motor insurance pricing more broadly, but in a statement on Labour’s Plan for Drivers, the association’s director of general insurance policy was “entirely committed” to supporting drivers and taking “clear, practical steps” to help tackle the cost behind motor premiums and improve road safety.

UK personal motor insurance is highly price competitive

UK personal motor insurance is highly price competitive

UK personal motor insurance is highly price competitive, mainly due to the influence of price comparison websites. Lower claims costs should lead to reduced prices for customers.

The rapid increase in car insurance prices may be slowing down. In the first quarter of 2024, prices dropped by 5% compared to the previous quarter, according to the WTW/Confused price index.

Insurers believe they have mostly adjusted their pricing, assuming inflation remains steady. Most insurers will slightly increase prices this year to maintain their margin against claims inflation.

Insurers are cautious about reducing prices due to the risk of sudden spikes in inflation and claims costs, which could force them to adjust prices upward again.

Beyond personal motor insurance, London’s international insurance market, including Lloyd’s, the London company market, and brokers, also has expectations for the new government.


AUTHOR: Ben Dyson – insurance reporter covering the EMEA region at S&P Global Market Intelligence

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