Shifting gears in a changing landscape

Recent years have been the most challenging for the UK motor insurance market, recording a loss-making financial year net combined ratio (FYNCR) of 112.7% in 2023. This followed a tough 2022, when the sector saw FYNCR of 111.1%. This was caused by claim frequency increasing from COVID-19 induced lows and adaption to changing regulation and tort reform including:

• Whiplash reforms (May 2021) which reduced compensation for minor whiplash injuries and introduced a fixed tariff system for claims below GBP 5,000.
• General Insurance Pricing Practices (GIPP) reforms (January 2022), in which the Financial Conduct Authority (FCA) addressed price walking. These new rules require home and motor insurers to offer renewal prices that are no higher than what would be offered to cover the same risk if it was new.

The average NCR over the past 6 years from 2018 to 2023 stood at 101.2%, according to Swiss Re data (see figure 1).

Despite rising market premiums, up to 17.8 billion in 2023 compared to 15.4 billion in 2022, claims trends impacted by socio-economic factors continued to negatively impact the sector.

Maintenance and repair costs in the UK increased to 9.8% as recorded in January 2024, whilst health inflation increased to 7.6% in 2023. Similarly, the median hourly earnings for all carers increased by 8% in 2023 and provisionally, 7% in 2024, according to the Annual Survey of Hours and Earnings (ASHE).

In addition, the total distance driven by motorists in Great Britain reverted to levels seen in 2019 prior to COVID-19, with almost 334 billion vehicle miles travelled in the 12 month period ending September 2024, according to government figures. Furthermore, the price of used cars in the UK, which is a proxy for own damage and third-party property damage claims inflation, also peaked in 2023 to an average asking price of just over GBP 18,000, however, this reduced in 2024 to under GBP 17,000 with inflationary pressure decreasing (see figure 2).

As well as falling inflation, continued improvements in claims frequency, and pricing corrections on premiums in 2023 have resulted in many commentors, including Ernst & Young (EY), forecasting a return to profitability last year with a NCR expected to be in the low to mid 90% range. EY also expects the motor insurance market to record a FYNCR of 101.6% in 2025 as premiums start to reduce.

However, the UK motor insurance market faces a number of headwinds and tailwinds that require a disciplined approach to underwriting and policy structures for both insurers and reinsurers:

• The long-term trend of improving safety levels on UK roads continues. Despite the rising human and financial cost of road traffic accidents, Great Britain has experienced a downward trend in fatalities, with 1,624 fatalities in 2023, a decline of 5% compared to 2022 and in total 132,977 casualties of all severities, a decline of 2% from 2022.
• ABI has unveiled a combination of actions that industry, government or regulators could initiate to help bring the cost of premiums down in a 10-step roadmap.
• Whilst there are more cars on the road there have been fewer accidents, however insurers paid out GBP 9.9 billion in 2023, according to the Association of British Insurers (ABI), the highest figure since they started collecting claims data back in 2013 and up by 18% from GBP 8.4 billion in 2022. This demonstrates continued willingness by insurers and their reinsurance partners to support policyholders when accidents happen.
• According to data from the RAC foundation, 1.3 million electric vehicles (EV) entered UK roads in 2024, up almost 39% year on year. Although numbers are increasing it has not impacted EV repair costs yet, however we expect more costly repairs in the long term. According to a 2023 report by the UK's Thatcham Research, EV damage claims are currently 25% higher than Internal Combustion Engine (ICE) vehicle equivalents and can take 14% longer to repair.
• The Autonomous Vehicles (AV) Act 2024 could mean that self-driving vehicles are on British roads by 2026. On one hand this is likely to reduce the frequency and severity of road traffic accidents eventually by reducing human error, which contributes to 88% of road collisions. On the other hand, this safety gain could be offset by distracted drivers. The Act sets out where liability lies when a vehicle is in autonomous mode. Additionally, the potential for cyberattacks on AV presents a step change in the nature of the risk, especially with regard to accumulation.
• Following the 2021 Whiplash reforms, the UK government announced a ~15% increase in the fixed tariff for whiplash injuries, set to take effect on 31 May 2025 for injuries occurring on or after this date. This adjustment aims to account for inflation since the original tariffs were introduced in 2021 and includes a buffer for further inflation up to the next review in 2027.
• Geopolitical uncertainty and potential supply chain disruption, affecting the availability of vehicles and spare parts. This can lead to delays in repairs and increased costs, which will need to be reflected in insurance premiums.
• The UK's aging population increases uncertainty in quantifying care costs in large bodily injury claims settling 5 to 10 years or further in future, arising from accidents in present underwriting years.

There will be a lot of discuss in coming years and to ensure the re/insurance market can help to make the roads safer and maintain profitability.