Fleet rates to keep rising as pricing lags inflation

Fleet risk management and captive insurance are coming into sharper focus as the UK motor market hardens in response to the rising cost of vehicle repair.

Personal lines motor premiums in the UK rose by 25% last year, while the average premium in the fourth quarter of 2023 was 34% higher than the same period of 2022, according to the Association of British Insurers (ABI). However, rate increases did ease in the first quarter of 2024, rising by just 1%.

Specific industry data is not available for commercial motor insurance but fleet price increases have been around half those seen in the personal lines market, Jonathan Dye, director of underwriting for motor at QBE Europe, told Commercial Risk. This is in part due to the different risk profile of commercial motor. For example, electric vehicles – which have contributed to the higher cost of claims – are less prevalent in the commercial fleet.

Commercial motor rates are likely to continue rising in the short term, said Dye. “We will probably see current levels of rate increases coming through to counter the lag in inflation,” he said.

“Over time, we will see some stabilisation in the market, but I don’t think that will happen in the immediate future because insurers are behind the curve. Generally speaking, pricing of motor insurance has not kept pace with inflation,” Dye said.

The outlook for the fleet motor market remains uncertain, according to Miles Hebden, logistics and major fleet director at broker A J Gallagher. “The market is generally pushing for rate increases on most renewals, but at the same time, we are still able to negotiate reductions, particularly on well managed fleets,” he said.

Claims experience on poorly managed fleets are driving the biggest increases, particularly where there is high loss frequency, rather than one large claim, explained Hebden.

“We are not seeing blanket increases from any of the major insurers, which is a positive step forward, as they are still willing to review each risk on a case-by-case basis. Making the emphasis on targeted, proactive, risk management improvements more important than ever,” Hebden said.

Some businesses are considering greater self-retention and changing coverage structure to retain more risk and transfer less, he added. “Fleet owners will be showing more interest in non-conventional options and captives may see increased appetite for the larger fleets if the motor market hardens further,” said the broker.

The rise in motor premiums reflects the higher costs of claims, according to the ABI. Since 2017, motor claims costs have risen by 23% in real terms, reflecting inflation and higher repair costs. According to EY, 2023 is likely to be the worst-performing year since 2010 for UK motor insurers, with a forecast combined ratio of 114.6%.

The ABI says that repair costs increased 32% in the third quarter of 2023, due to a mixture of higher labour costs, rising energy prices and more sophisticated vehicles. Longer repair times drove up the cost of providing replacement vehicles by 47% in the third quarter of last year, while the cost of replacing written-off vehicles has risen by 43% over a five-year period, as new cars became more expensive, it said.

Fleet motor claim frequency has returned to pre-pandemic levels, while claims severity has increased significantly, driven by supply chain disruption, labour shortages, new vehicle technology and the growing prevalence of electric vehicles, explained Dye.

The average cost of repairing damaged electric vehicles is much higher than petrol and diesel models. Electric vehicles are approximately 25% more expensive to repair than their petrol equivalents and take 14% longer to fix, according to Thatcham Research. Electric vehicles tend to be new, contain the latest technology and require more specialist expertise to repair, explained Dye. For example, the cost of replacing a damaged battery can be two thirds the cost of the vehicle, and in some cases can exceed the vehicle replacement cost, he said.

“These trends are likely to continue with increasing penetration of electric vehicles, although some costs associated with EV parts and components should start to come down over time with their increased adoption and greater economies of scale,” said Dye.

In addition to the higher cost of repairing damage, insurers must also price in expected future losses from personal injury claims. Personal injury claims inflation has been benign in recent years, reflecting the success of UK whiplash reforms implemented in 2021 that sought to limit the cost of low-value road traffic accident claims. However, recently updated Judicial College court guidelines for damages increase the value of personal injury claims by 22% on 2022, a “significant uplift”, noted Dye.

Insurers will also need to factor in changes to the discount rate used to calculate damages for high-value life-changing personal injury claims, which is currently under review in England. Insurers are monitoring the review – which should result in a change to the discount rate by January 2025 at the very latest – and will adjust their pricing models accordingly, according to Dye.

Rising commercial motor insurance prices are putting an increased focus on risk management, and in some cases has led to buyers increasing retentions, he continued.

“For any business, it focuses the mind on how they can manage the cost better. Whether that is an investment in risk management, or potentially taking more risk, or both. A number of clients we work with have increased their appetite to take more of the exposure themselves, typically in conjunction with a bigger investment in risk management and improving risk culture,” said Dye.

Fleet businesses need to invest in risk management, either through engineering solutions or behavioural measures – for example, cameras and driver coaching, according to Hebden.

“Most insurers now have the technical knowledge to assess fleet risk management measures and effectiveness. It is important for fleet owners to have an overview of their current loss and risk management profile and to be able to articulate their plan for improvement,” he said.

“This overview should include fleet compliance, engineering and behavioural solutions, along with any relevant fleet key claim indicator – for example, first notification of loss, average cost per vehicle and claim frequency. Targeted risk management is key, reviewing the reason for incidents to ensure any risk management is proactive against reducing future losses from the same circumstances,” Hebden said.