How can the industry make premiums more affordable for vulnerable customers?
October 14, 2024
I had the pleasure of taking part in the ABI’s 2024 Motor conference entitled ‘Braking Point: Challenges in Motor Insurance – what can we do about them?’. As the title suggests, the conference focused on the challenges facing the market and in particular the issue of high premiums and the impact on customers.
Unfortunately, despite good attendance from across the industry, we did not manage to find a silver bullet to solve the problem. Indeed, it was clear from the discussions that the solution lies in marginal gains that will add up to a significant change over time. It was also apparent that this will require collective efforts from the whole industry, regulators and government as it cannot be solved by one company alone. Indeed, only the week after the ABI conference the government announced that it is forming a taskforce of industry, consumer and regulatory representatives to take on the issue of high motor insurance premiums.
What is the problem?
As we discussed in detail in our Motor Market Report 2024, the UK motor insurance industry has been through several years of significant change. The COVID pandemic, the war in Ukraine and the implementation of the General Insurance Pricing Practice rules have all had major impacts on the industry. The high inflation environment has pushed up claims costs for insurers which has had a knock-on impact on premiums. While many insurers are now on a more stable financial trajectory for 2024, affordability remains a significant issue for many customers.
What are the solutions?
The obvious answer to the problem is to reduce the cost of claims. I have set out below some of ideas to come out of the conference. I would, however, also argue that making the whole industry more efficient will help to reduce premiums for customers. The market is one of the most price competitive in the world and therefore premiums are directly related to all the underlying costs of the business, both claims and expenses.
Make better use of green parts
The insurance industry writes off over 1.5 million cars every year. Most of these cars are simply scrapped. If the industry could efficiently re-use the parts from these written off cars it could potentially save money (parts inflation has been a big issue in recent years) and make a significant difference to the environment.
Raise the small claims track limit
The limit for “small claims” on the OIC portal has been set at £5k since 2021. Given the level of inflation in recent years it would be logical for this to be increased to £7.5k or more. This would capture more of the small injury claims within the more efficient small claims track where legal fees cannot be recovered from the at-fault party, reducing costs within the system.
Increase training within the repair network
The motor repair network has been struggling to rebuild having seen many leave its ranks during COVID. The industry is also trying to cope with increasingly tech-filled vehicles and EVs that require specialist training to fix. Thatcham estimated that only 16% of technicians are able to work on EVs. As the uptake of EVs increases this will put further pressure on the system unless more is invested into training. Government backed apprenticeship schemes can help here.
Invest in infrastructure changes
Another item for the government’s inbox is to improve the quality and design of the road network. If the roads themselves are better, there will be fewer accidents. A recent study by esure found that introducing 20mph zones in Wales has reduced accidents by 20%. If we can reduce the number of accidents it takes risk out of the system entirely and can be a win-win for customers and insurers.
Increase the Personal Injury Discount Rate
The Personal Injury Discount Rate (PIDR, also known as the Ogden rate) has recently been reset to +0.5% in Scotland and Northern Ireland. The rate in England and Wales is currently under review and sitting at -0.25%. A shift up would reduce the cost of the largest claims in the market and potentially allow insurers to reduce premiums for customers. We are expecting a decision on the PIDR in January 2025.
The Oxbow Partners View
The issue of insurance affordability is a difficult one. The overall rate of premium increase in 2023 (+25% in average premium across the market) does not tell the full story of the last few years, but that doesn’t matter to customers who are struggling to afford their insurance. An amazing statistic from the ABI conference was that Fair4All Finance estimate that as many as 20m people in the UK are financially vulnerable. This is not some small subset of the market.
Premiums are beginning to reduce but meaningful change cannot happen just through the actions of individual companies or even the insurance industry as a whole. The government and the regulators will need to be involved. The whiplash reforms are an example of how this can work. If we can reduce the risk in the market, premiums will come down.
About the author
Paul De’Ath leads Oxbow Partners Market Intelligence team. Prior to joining Oxbow Partners Paul spent nine years as an equity research analyst covering all aspects of insurance across the UK and Europe. He started his career as an accountant at EY and also spent some time in industry at Standard Life.
