It is an expensive time to be a driver in the UK. Prices at the pump have been rising all year — and are now a fifth higher than in January. On top of that the task of renewing car insurance has become more painful.
According to the AA, motor insurance prices have been increasing since early 2014. Back then the average annual comprehensive premium was £460, it says. Now it is £585. Drivers have been faced with annual increases of about 15 to 20 per cent at a time when UK inflation is running at 1 per cent.
For investors, the jump in premiums is a chance for the motor insurance industry — which, according to Deloitte, has made an overall underwriting profit only twice since 1982 — to produce better returns.
Insurers’ share prices have been rising alongside the premiums they charge. Shares in Direct Line and Admiral, both of which have large UK motor businesses, have risen by a third since the pricing cycle turned up, outperforming the FTSE 100.
And many of the insurers have taken rising premiums as an opportunity to expand. Updates from Direct Line and Esure this week reported strong growth in their motor businesses. “When the market was in its downturn, we slowed down,” says Esure chief executive Stuart Vann. “When the cycle and conditions are right, we grow the business.”
Some industry observers say there is little justification for the premium hikes.
Tom Jones, head of policy at law firm Thompsons Solicitors, which works on behalf of claimants, says claims costs are 30 per cent lower than they were six years ago.
“The figures we see suggest that prices should not be rising. We see the profits [the insurers] are making and the dividends they are paying,” he says.
Between 2012 and 2014, 30 per cent was discounted off rates, predicated on the [government] reforms. The market has now had to look to recover that discount.
The companies disagree. “The price rises are really just covering the cost of manufacture,” says Mr Vann. Part of the reason, he argues, is that legal reforms introduced in 2013 have not delivered the expected decrease in whiplash claims. The AA recently said that the UK was in the grip of what it called a “whiplash epidemic”.
“Between 2012 and 2014, 30 per cent was discounted off rates, predicated on the reforms,” says Mr Vann. “The market has now had to look to recover that discount.”
He would like to see the government follow through with plans for changes to the small claims system. The plans — which were supposed to end the right to claim cash compensation for minor whiplash injuries — were announced in last year’s Autumn Statement, but so far there has been little concrete action.
Analysts also point to a range of other factors for the rising cost of policies.
Top of the list is insurance premium tax, which has risen from 6.5 per cent just over a year ago to 10 per cent. A strenuous lobbying effort is under way from the industry to prevent another increase in this year’s the Autumn Statement this month.
Rising repair prices are also to blame. “New sensors in cars make car parts much more expensive,” says Philip Kett, analyst at Macquarie. “If there are sensors, the cost of replacing a bumper is two to three times more expensive.” The fall in the value of sterling over the past few months will exacerbate the situation by making imported parts more expensive.
Eamonn Flanagan, analyst at Shore Capital, points out that as the economy picks up the number of miles driven on the UK’s roads also rises. And he says that the costs of periodic payment orders, under which money is paid to claimants via regular payments rather than as a lump sum, are also becoming more expensive for the insurers.
Despite all the increases, Macquarie analysts say they are not convinced prices are going up by more than the insurers’ costs.
However Mr Flanagan says rate increases have outstripped claims inflation.
“So there is a purple patch,” he says. “You’d hope to see some improvement in margins start to come through.”
The issue is critical to the insurers. Income from their investment portfolios has been falling in recent years as interest rates have declined. The impact on profits has been offset by high levels of what the industry calls reserve releases — the release of money that was set aside to cover claims in previous years but is no longer needed.
Analysts say that the level of these releases could decline, making it crucial that the insurers underwrite profitably now. And as Mr Flanagan points out: “the rate of price increase is starting to slow.”
At the start of 2016, prices were rising by 21 per cent a year. By the third quarter, that slowed to 16 per cent.
While that may be a concern for the insurers, which have enjoyed two years of rising premiums, it is a potential sign of relief ahead for the UK’s beleaguered motorists.