Jefferies’ data on the UK motor insurance market shows that its pricing data only showed inflation for new business quotations, it did not include the impact of renewals, which was estimated to broadly make up 60% of total motor insurance premiums.
The report states that following the FCA’s pricing practices reform introduced this year for UK motor insurers, it is safe to assume that rate changes will be less for renewing business than for new business throughout 2022.
Therefore, the assumption is that overall rate changes for UK motor insurance are likely to be less than what Jefferies’ tracker suggested earlier. According to that, new business premiums were up +28% in Q4, whilst the ABI’s pricing tracker which incorporates renewing premiums suggested pricing was only up +7% in Q4 YoY. We expect that this disconnect should normalise in 2023.
According to the report, the UK motor insurance pricing continues to harden, with market average premiums up by +4.2% MoM.
Premiums were up by +39% YoY in March. Jefferies’ UK motor insurance tracker shows that premiums are +39% higher YoY in March and +4.2% higher versus the prior month. There is still a slight deficit that remains relative to pre-pandemic margins, although this is expected to close in the next one or two months given the pricing momentum across the market in recent months.
The report predicts that the market needs to implement a further +3% of the rate increase to eliminate the pricing deficit that has emerged since the pandemic (on a written basis). The cumulative rise in claims of +28.2% still exceeds premiums that have been +25.5% since the start of 2019.
This implies that a slight deficit remains relative to pre-pandemic margins, the monthly rate increases have consistently been 2-4% since Q4 2022, due to this the report shows that this deficit to close in the next month or two assuming that this momentum remains.
On a GAAP/reported basis, where there is a lagged impact on premiums, this pricing deficit is expected to close during 2024 assuming the market continues to price for claims inflation.
The report also suggests that claims severity inflation is moderating in areas such as car damage claims. The cost of maintenance and repair, spare parts and car hire costs were reduced in March versus the prior month.
In addition, the cost of second-hand cars remains 4.5% lower YoY. All these costs play a major role in the elevated claims inflation that has impacted the industry in recent years. The main unknowns currently are the impact of third-party claims on damage inflation, which has been particularly elevated recently.
According to the report, the RSA’s exit from the UK motor insurance is another key change that took place in the industry towards the end of March. The announcement made by Intact that it would be withdrawing from the UK retail motor market, representing approximately £120m in annual premium for the group.
Jefferies’ report draws two elements of read-across from this for UK motor insurers. First, a major player has exited the market, resulting in a reduction in overall market capacity which should be a tailwind for pricing going forward. Secondly, a sophisticated and well-renowned underwriter has determined that UK motor insurance is no longer a viable line of business to engage in.
