Potholes and Payouts: The surging cost of motor insurance claims

Inflation of motor insurance claims continues to be a hot topic among insurers. Last month, the Association of British Insurers (ABI) released data from its Motor Insurance Premium Tracker, highlighting a rise of 29% in motor insurance payouts in the second quarter of 2023, far outpacing premiums.

The quarterly tracker analysed 28 million motor insurance policies over a 12-month period providing a clear indication of what UK motorists are paying for their coverage.

As of January 1st, 2022, the pricing reforms implemented by the FCA assert that the price paid by renewing customers will not exceed the price charged to new customers for an equivalent policy purchased through the same distribution channel (such as an insurer, broker, or price comparison website). It's important to note that these rules do not establish or limit the premium paid by either new or existing customers.

The jump in motor insurance payouts is the highest recorded since the ABI began collecting data in 2013 and is a 3% increase on Q1.

The ABI estimates that vehicle theft, repair and personal injury claims have increased by 14% from Q1 to Q2 2023. The higher premiums reflect continued rising costs for insurers, with £2.4 billion being paid to claimants in the second quarter of 2023, and an increase of 14% on Q1.

In June, a press release statement from international consultants Ernst & Young stated “The UK motor insurance market experienced its worst performing year in a decade in 2022”.Their report highlighted that for every £1 motor insurers received in premiums, they paid out £1.10 in claims and operating costs. Further losses for the motor insurance sector are predicted to last well into the latter half of 2023, reversing the profitability achieved during the pandemic years when the low usage of cars and vehicles translated into fewer claims.

Richard Reed, Head of UK General Insurance at Ernst & Young, concludes: “Consumer premium rates have remained far below the level needed to keep pace with inflation and the return to more regular motor activity post-pandemic. However, the need for the sector to address this and rebalance its books, unfortunately, means that consumers will face a sharp rise in their premiums. 2023 will undoubtedly be tough for consumers and insurers alike, but we expect these challenges to ease once inflation falls back.”

The cost of vehicle repair has soared by 33% over the year since Q1 2022 to £1.5 billion. Fuelling the increase, a 40% increase in labour costs, a shortage of skilled workers coupled with the increased cost of raw materials/replacement parts for vehicles has made the cost for insurers extremely difficult to absorb.

With early signs of a declaration in the rate of UK inflation in recent months, there are hopes on the horizon for costs to fall. But for now, that glimmer of cost-reduction brings little comfort for both insurers and consumers.