The UK motor insurance market faced its most challenging year since 2011, recording a loss-making Net Combined Ratio (NCR) of 112.8% in 2023, but with declining inflation and rising premiums a return to profitability is foreseen, according to Ernst & Young (EY), a professional services firm.
This followed a lackluster 2022, when the sector saw an NCR of 111.1%. Rising claims costs, driven by sustained high inflation, increasing expenses for materials and labour, and premiums that did not keep pace with claims inflation, contributed to the difficulties.
However, with inflation now declining and premiums rising in the latter part of 2023, EY anticipates a return to profitability for the UK motor insurance sector in 2024, forecasting an NCR of 96%.
Mat Wheatley, UK Insurance Partner at EY, said: “High inflation and rising costs have resulted in an extremely difficult couple of years for the UK motor insurance sector. This was particularly the case in 2023, which also saw balance sheets impacted by the delayed reaction to required premium adjustments in 2022.”
“It has been a hard time for the sector, but hasn’t just been challenging for firms; 2023 was also difficult for motor insurance consumers who have faced a sharp increase in premiums to bring them in line with claims inflation. However, with inflation now falling and claims costs easing, better news is on the horizon for both insurers and consumers, and we expect to see the motor insurance sector return to profitability this year,” continued Wheatley.
In 2023, premiums surged by more than a quarter (£544 per policy) and are expected to continue rising in 2024, reflecting ongoing adjustments due to inflationary pressures.
Consumer premiums are projected to increase by an additional 15.9% year-on-year in 2024 (£87 per policy on average). However, as the market stabilises and returns to profitability, consumer premiums are anticipated to decrease by -3.7% year-on-year in 2025 (-£23 per policy on average).
Wheatley added: “While there are positive signs that profitability for the motor insurance sector is within sight, macroeconomic challenges remain, and there is a sense of uncertainty around the impact of the 2025 Odgen discount rate change.”
“As ever, it will be vital that motor insurers continue to carefully monitor their costs, adjust to changing customer behaviours, and support vulnerable customers while also looking for opportunities to innovate and grow.”
