Why are car insurance premiums rising?
With general inflation as measured by the Consumer Prices Index (CPI) running at over 11% and pressure on household incomes coming from various directions the last thing you want to face is a significant increase on your cover or insurance premiums.
However a number of factors have come together over the last 2 years or so to lead to the current market in which the Association of British Insurers (ABI) are reporting average annual increases of over 25% for private motor insurance premiums.
Following a prolonged period of relative price stability, driven by low inflation and a competitive market, price increases started to accelerate in 2022, particularly following Russia’s invasion of Ukraine. This added to existing inflationary pressures as a result of the bounce back from the Covid pandemic when savings built up during lockdown flowed back into the economy. This was also at a time when there were still supply chain bottlenecks as businesses struggled to get back up to speed post-pandemic and meet the extra demand. That meant prices went up.
The combined effect of these two abnormal ‘shocks’ has led to some highly unusual spikes in raw materials prices and labour costs.
Examples of increasing cost pressures cited by some ABI members include:
- Energy inflation adding to each repair.
- Average paint and material costs have increased by nearly 16%.
- Courtesy car costs to repairers are increasing at around 30%.
All of the above factors apply in driving up costs.
From an insurance point of view when underwriters were determining their pricing strategies for 2022/23 it was very hard (and in the case of Ukraine arguably impossible) to foresee these sudden changes and therefore expectations of inflation may have been much lower for some. A sudden and unexpected spike in inflation is especially challenging for insurers since they will pay future claims from premium charged to reflect the risk calculated using previous claims costs. It is no coincidence that a number of providers have reported very poor results in motor insurance for 2022, associated bills for claims were much higher than had been anticipated. That in turn means that this year, in some cases, we will see a 'double whammy' effect whereby rate increases are introduced in order to both make up for any shortfall from previous periods, whilst also allowing for future expected inflation that will be impacting claims made on policies taken out / renewing in 2023 and 2024.
We hope that possibly as early as mid-2024 rate inflation may reduce to more 'normal' levels. However, it's worth remembering price changes, may be much more or much less than the average - and will depend on things like the vehicle value and type, age of owner/user, location / storage of vehicle all of which have a significant impact on price we pay…
For further reading or additional source material, visit the Association of British Insurers website here and here or the Insurance Business website.
Information referenced in this blog gained from Insurance Today website.
Information reviewed and provided by our partner broker Devitt Insurance Services.