A recent report from Jefferies suggests that UK insurance claim inflation across the market is worse than feared, which has a knock-on effect to reinsurers in inflating claims and losses.
The firms UK motor insurance tracker showed that new business premiums are +32% higher YoY in December.
However, whilst this is significant, including the impact of renewals, overall rate increases are likely to be lower following the FCA’s pricing practices reform introduced at the start of 2022.
Jefferies estimates that premiums are actually +20% higher YoY in December overall, which is still likely to be ahead of claims severity inflation.
Another factor that Jefferies notes has been driving claims inflation in recent months has been a rise in the cost of second-hand vehicles, which impacts total loss settlements.
The firm noted that with the semiconductor shortage still impacting new car sales, it expects that inflationary pressures on second-hand vehicles will remain.
Additionally, the report reads that based on inflation data of the cost of spare parts, repairs and car hire, Jefferies calculates an independent view of claims inflation by applying a weighting to each of these categories.
The firm assumes that spare parts account for 50% of damage claims, repair costs account for 30%, and car hire costs account for 20%. Jefferies analysis also showed that claims inflation is showing signs of moderating, with inflation at +4.5% in December 2022 compared to +5.8% in November.
However, Jefferies stated that this does not capture third party claims inflation, which appears to have been particularly elevated during 2022.
