Inflation is “beginning to bite” in the UK motor insurance market causing adverse trends, particularly relating to claims inflation, analysts at J.P. Morgan have observed.
A drop in claims inflation in the near term is hard to imagine, analysts highlighted, mainly due to supply chain issues, and wider economic inflation.
In its latest trading update, UK motor insurer Sabre estimated that claims inflation had increased materially for the company year-to-date.
In 2021, the company estimated that claims inflation in motor was 8%; by Q1 2022 this had increased to 10% and by 1H 2022 the level had increased to 12%, a 50% increase in claims inflation in the last six months.
According to J.P. Morgan, historically, Sabre has seen higher levels of claims inflation compared to the larger listed UK motor insurers.
For example, Direct Line is usually able to manage claims inflation better than the UK motor insurance market as it owns a large repair network and is therefore able to control costs better.
In the case of Admiral, its claims costs are also around 10% lower than the market.
However, J.P. Morgan’s analysts argue that the direction of travel on claims inflation is difficult to ignore, and if it is assumed that Direct Line has experienced similar claims inflation trends to Sabre, it could put the company’s claims inflation at ~10%.
In a normal market, prices should adjust for claims inflation, but in the last couple of years it has been anything but normal, J.P. Morgan noted.
Firstly COVID-19 materially reduced claims frequency trends followed by the FCA pricing practices review being introduced in 2022.
J.P. Morgan explained: “Prices YTD in UK motor insurance have disappointed, according to Confused.com, motor prices were up 2% in Q1 22.
“In order to get more positive on the UK motor insurers, there needs to be a material correction in pricing or claims inflation needs to reduce in order to allow the insurers to make better margins.
“On the claims inflation side, we believe that this is unlikely and on pricing, we think that a correction is unlikely at least until late 2H 22.”