Increase in car insurance rates: reasons and explanations
Car insurance premiums have been on a steady rise in recent years, with customers paying more for their coverage due to various external factors. A review conducted by the Financial Conduct Authority (FCA) has shed light on these factors, providing insights into the reasons behind the premium increases.
According to the FCA's analysis, the primary drivers of increased car insurance premiums are the rising costs of motor claims due to more frequent and severe accidents, higher vehicle repair and replacement costs, increased legal and claims expenses linked to risky driving behaviors, inflation, and higher costs related to hire vehicles, theft claims, and uninsured drivers. These external cost pressures have led to underwriting losses for many insurers, forcing premium hikes to cover these increased expenses rather than simply boosting insurer profits.
The FCA's investigation also highlighted several problematic practices within the insurance industry that exacerbate consumer costs and lead to poor outcomes. These include referral fees paid to credit hire companies and claims management firms, which slow down claims processing and increase costs. Inadequate oversight and management of outsourced claims handling, causing delays and higher complaint rates, were also identified as issues.
The FCA's review found that only 32% of storm damage claims led to payouts in 2024, highlighting a high rejection rate of claims. Additionally, the FCA's research indicates that a lack of effective management information systems limits insurers' ability to address problems effectively.
Sarah Pritchard, deputy chief executive of the FCA, stated that insurance provides peace of mind, but customers must be confident they can get a fair deal and be treated right when the worst happens. She emphasised the importance of shopping around for car insurance to avoid paying more due to inertia.
The FCA's review was prompted by concerns over the growth in premiums since the pandemic and during the cost of living crisis. The authority has already introduced rules to stop insurers from favouring new customers over existing ones.
In response to the findings, the FCA is exploring further the issue of firms making excessive profits from monthly payments. The authority has also suggested higher penalties for insured drivers to be implemented.
Some costs related to car insurance are outside an insurer's control, such as the rising prices of parts, labor, energy, and more complex cars and supply chains. However, the FCA suggests that the government could help reduce repair delays and labor costs by boosting the supply of skilled labor.
Between 2019 and 2023, the average car insurance premium increased from £443 to £545, representing a 23% jump. The typical claim cost has also increased by 37% during the same period, reaching an average of £3,293. The cost of hire vehicles has risen significantly, while the cost of claims associated with uninsured drivers has increased from £328 million in 2019 to £452 million in 2024.
In summary, the FCA attributes the car insurance premium rises primarily to unavoidable external cost inflation but also warns that industry practices around claims handling and outsourcing can worsen pressures on costs and customer experience. Insurance provides peace of mind, but customers must be confident they can get a fair deal and be treated right when the worst happens. Shopping around for the best deal and understanding the type and level of cover needed can help consumers navigate these challenging times.
References: 1. Car insurance premiums rise due to external cost pressures 2. FCA review of the car insurance sector 3. FCA raises concerns about referral fees in car insurance sector 4. FCA research on car insurance premiums
- The primary drivers of increased car insurance premiums, as identified by the FCA, include rising costs of motor claims, higher vehicle repair and replacement costs, inflation, higher costs related to hire vehicles, theft claims, and uninsured drivers.
- To avoid paying more due to inertia, Sarah Pritchard, deputy chief executive of the FCA, emphasized the importance of shopping around for car insurance, which aligns with personal-finance practices that encourage comparison-shopping to find the best deals.
