If you’ve renewed a car insurance policy this year, the chances are that you will have noticed a sharp increase in the premium.
There are a number of organisations who track and monitor insurance premiums and they all note that the average cost of car insurance has dramatically increased in the last 12 months. Industry tracking indexes report increases of between 40% and 60% on average over 2022 prices.
Why have Car Insurance Premiums gone up?
There are a range of factors which contribute towards the recent pattern of car insurance increases. Remember that even if you are not directly affected by claims patterns, the nature of insurance is that “the premiums of many will pay the claims of the few”. So, where those unfortunate enough to be involved in claims are generating more cost, that cost is shared among us all:
Increased Claims Costs
According to ABI (The Association of British Insurers) statistics, the cost of vehicle repairs has risen by 46% in the last year. This is due to a number of inflationary cost increases – including for energy prices, spare parts, labour and paints. In addition, the complexity of modern cars means that the repairs are more difficult and therefore more expensive.
A car repair which might have cost £5,000 in 2022 would now cost £7,300.
Increase in Claims Frequency
Since the end of the COVID-19 Lockdowns, the volume of traffic on our roads has continued to rise. More cars lead to more accidents. The frequency of incidents has increased each year since the quiet roads of 2020 (where premiums did drop) and is reflected in the increases in premiums.
Increases in Car Values
Increased demand since COVID-19 and following the onset of war in Ukraine have led to a strengthening of the value of used cars. Autotrader analysed their marketplace and reported a 36% increase in the value of 3 to 5 year old vehicles in the 12 months to March 2023. This means more cars are being repaired by insurers, that would previously have been written off, and that the value of Total-Loss vehicles is higher than before.
Injury Compensation
Changes to the technical legal basis on which serious injuries are calculated (relating to something called “The Ogden Rate”) mean that the cost of such injury claims has dramatically increased in recent years – sometimes running to millions for single claims.
At the same time, there is a co-relation between Economic Downturns, Recessions, and the recent “Cost-of-Living-Crisis” and the likelihood of spurious Personal Injury Claims. If money is tight, the temptation for people to pursue legal action for minor injuries is far stronger than at other parts of the economic cycle.
Fraud
According to the ABI, the average contribution towards the industry cost of fraud adds £50 to each policy.
Uninsured Drivers
If you are injured in an accident with an uninsured driver, the Motor Insurance Bureau will handle the compensation. However, the MIB is funded by a pool from everyone’s premiums, and a contribution of around £30 per policy goes to them.
Insurance Premium Tax
IPT was created in 1994 at a discrete level of 2.5% of any insurance premium. It now sits at 12% which is much more significant, especially when this adds directly to the cost of insuring your car.
FCA Pricing Review
The Financial Conduct Authority Regulates all Insurance Activity in the UK. From January 2022, the FCA amended the way that pricing works, so that discounting premiums to attract new customers was not allowed (see The General Insurance Pricing Practices). Instead, insurers and “distributors” would need to demonstrate that they offer the same premiums to all customers, both for New Quotes and for Renewal Quotes.
The intended effect of this was to ensure that loyal customers were not penalised. However, the actual consequences feel different. Along with the other factors mentioned above, this means insurers can’t drop their New rating/prices without similarly dropping their ratings/prices for every single existing customer, of which there may be millions.
As a result, in seeking to create a level playing field, it feels like the consequences have been the general increase of prices to the highest common denominator. The market is now fairer, but more costly for most people, especially those who are in the habit of shopping around.
Electric and Hybrid Cars
The continuing rise of the sales of EVs means an increase in the technological advancement of vehicles. As these EVs come with a higher price tag, their enhanced technology means that repairs are more expensive and take longer. With supply chains still impacted by COVID backlogs and so much of the auto parts industry based in/around Ukraine, there are often costly delays for repairs.
Car Insurance Premium graph – 5 years to March 2022
Conclusions
Not a lot of good news for motorists at the moment, but motor insurance is a competitive market. Insurers operate on a very narrow profit base, so if the prices charged now lead to insurers become excessively profitable, future price competition should see a swift correction or re-calculation of rates.
