UK motor market set for further rate increases

UK motor insurance rates are likely to increase further in 2024 as insurers price for claims inflation and uncertainty, according to fleet motor insurer QBE Insurance.

The motor insurance sector is in a perfect storm, as vehicle usage returns to normal levels after the pandemic, and it faces up to higher energy costs, supply chain disruption and inflation, according to a recent QBE webinar. While these trends have stabilised in 2023, uncertainty remains elevated, according to Jon Dye, director of underwriting for motor at QBE in the UK.

“Why is uncertainty a problem for us as insurers? It definitely means we are less able to project the future cost of claims to a reasonable degree of certainty. Therefore, we have a lower confidence in pricing levels. Now that is not good for anybody, and it normally translates into what I would call price volatility,” said Dye.

“Our customers would have seen, as most customers have seen, premiums moving up and down quite sharply, which is never good for business,” he added.

According to the latest figures from the Association of British Insurers (ABI), motor insurance premiums increased by 29% in the third quarter of 2023, the highest ever recorded quarterly rise. Premiums for the whole of this year are expected to rise 22.5% and a further 18% next year.

“That is significant, and that is material,” said Dye. “2022 premiums have needed to significantly increase to keep pace with claims inflation,” he said.

“While claims inflation is expected to continue, it is expected to continue to a lesser degree. Very much tempting fate, I would suggest there is stabilisation in the level of unpredictability we are dealing with across the market. Which is a positive thing, but I think it will remain elevated against what we would normally expect and desire,” Dye said.

The ABI estimates motor claims inflation of 25% this year, and 11% in 2024. The average cost of repairing a petrol or diesel vehicle has increased 15% year on year since 2021, while the time a vehicle is off the road has doubled.

Having underestimated the impact of inflation last year, UK motor insurers reported a combined ratio of 106%, their worst result in over a decade, according to Dye. Deloitte thinks the UK retail and commercial motor combined ratio will range between an optimistic projection of 96.3% and a pessimistic projection of 109.7% in 2024. The wide range reflects uncertainty in claims inflation, premium and the planned review of the personal injury discount rate.

“The level of uncertainty is clear… the swing between the pessimistic and optimistic is a material six percentage points. And that is huge, especially when you reflect back on prior years and where projections of analysts would normally be,” said Dye.

Future motor claims inflation will be in part shaped by regulatory and legislative changes, notably likely changes to the personal discount rate, as well as geopolitical risks, supply chain resilience and advances in vehicle technology. “There is a huge amount for us to continue to navigate and manage,” said Dye.

The planned revision to the UK’s personal injury discount rate in the first half of 2024 will be closely watched by motor insurers, and could prove a positive for premiums, according to Dye. “Everyone is keen to understand [what to expect from the revision] as quickly as we can, both in terms of making sure that we are pricing appropriately and giving the right levels of compensation to injured parties,” he said.

In January, the government consulted on a potential change in the methodology for calculating the personal injury discount rate, moving from the historical single discount rate to a dual or multiple discount rate model.

“Is it going to stay as a single rate or move to a dual rate? If it moves to a dual rate, I think there is a fair amount of complexity, especially from an insurance and claimant perspective around what does that actually mean and how do we embed that new regime and process into the settlement of large claims,” said Dye.

If the single rate methodology remains, analysis for personal injury claims in England predict a discount rate ranging from the current -0.25% to +1.75%, according to Dye. “If it moves upwards, then larger claims would cost less for insurers… the expectation is that there would be a change to premiums, and reinsurance premiums that insurers are charged,” he said.