Insurance pricing – frequently asked questions

Is the cost of insurance going up, and if so, why?

The cost of some insurance is rising. The ABI collects data from its members on what they charge and over the last year the average motor premium has risen by 29% (Q3 22 to Q3 23).

When it comes to motor cover, the recent premium price increases have been driven by a spike in the cost to pay claims. These costs have risen at rates significantly higher than average inflation. In fact, while premiums are up 29% in the last year, the cost of paying claims is up 21%. Noting that the overall number of claims settled, at 570,000, rose 5% on the same quarter last year.

Price rises have been driven by claims cost inflation with EY estimating that in 2022 for every £1 paid in premiums, insurers incurred £1.11 in claims and expenses. They now estimate that this figure rose to £1.14 in 2023.

Even without taking recent inflation into account, the cost of vehicle repair has been steadily increasing. This is largely due to vehicles being much more sophisticated nowadays. A new car typically features an array of cameras, sensors, and screens that are expensive to repair and replace. And such sophisticated technology requires people with the associated technical skills to do the repairs, which can be in short supply, pushing up costs further.

Supply chain issues are also increasing the costs to settle claims and therefore what needs to be collected through premiums. For example, if it takes just a few days longer to receive a part for a vehicle awaiting repair, that’s three more days that the insurer may need to provide a temporary replacement vehicle to the driver.

Average home insurance prices haven’t risen to the same degree though. This is because home claims are much more impacted by big weather events like storms, floods or dry summers (which can cause subsidence). 2021 was relatively mild for such things in the UK, so premiums were lower than they might otherwise have been. But 2022 saw several storms (Dudley, Eunice and Franklin), a record-breaking summer heatwave and a cold snap in December. So, we could see these events impact the cost of home premiums this year, though insurers will strive to price as competitively as possible. Inflation of cost of materials and goods will also likely have an impact. For example, rebuilding a roof after storm damage or replacing stolen items after a burglary now costs more than they did before.

Motor and home insurance also incur a flat rate of 12% tax, known as insurance premium tax (IPT). This means that as the costs of cover increases in £ terms, that 12% accounts for a greater addition that drivers and homeowners have to stump up for. We don’t feel that IPT is a fair tax, as it’s punishing a responsible and often mandatory purchase. You can read more about our views on IPT here.

Finally, it’s worth adding that insurance is a competitive market. It is always worth shopping around to see if you can get different cover that is right for you at a better price.