In recent years, UK motorists have been feeling the pinch as car insurance premiums continue to skyrocket. According to a new report from FT.com, the average cost of new insurance quotes surged by nearly four times the rate of inflation between 2021 and mid-2024. This steep rise has left many drivers comparing their insurance costs to highway robbery, and the government has vowed to address the issue.
Several factors have been attributed to the soaring costs. Disruptions in supply chains, higher energy prices, and labour shortages are pushing up the expense of car repairs. The increasing complexity of modern vehicles, equipped with sophisticated technology, has also made repairs more costly. In addition, fraudulent activities, such as “crash for cash” scams, and inefficient claims handling systems have compounded the problem, leading to inflated insurance costs.
The Financial Conduct Authority (FCA) has recently launched an investigation into potential overcharging, especially concerning insurance paid in instalments. It is looking into the possibility of capping annual percentage rates (APRs) on premium finance, which could significantly impact the earnings of major insurers like Admiral and Direct Line. If such measures are implemented, insurers may face a reduction in earnings, unless they raise prices to make up for the shortfall.
A key question for many is why insurance premiums have risen so much more in the UK compared to the EU. While UK insurance premiums increased by a staggering 82% over the past three years, EU premiums have only risen by 19% during the same period, it was highlighted by the FT. Part of the explanation lies in the UK’s 2022 ban on “price walking”—a practice that offered better rates to new customers than to renewing ones. This ban caused new customer quotes to rise more sharply. However, when factoring in renewals, the broader measure of insurance prices shows that premiums are still £12 lower than their inflation-adjusted peak in 2017.
Despite these high costs, insurers themselves have not been immune to financial difficulties, FT.com noted. The motor insurance sector reported underwriting losses in both 2022 and 2023, suggesting that companies are not necessarily making excessive profits from these higher premiums. Nonetheless, with rising premiums, insurers are starting to return to profitability, with forecasts indicating a net combined ratio (the total of claims and costs as a percentage of premiums) of 96% in 2024, meaning insurers are now slightly in the black.
Some relief is on the horizon. Insurance premiums dropped slightly between the first and second quarters of 2024, signalling a potential easing of pressure on motorists. However, experts argued that a more comprehensive approach is necessary to address the broader systemic issues contributing to high premiums. This includes government action to curb fraudulent activities, improve claims processes, and tackle infrastructure problems like potholes.
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