Analysts at Jefferies have reported that UK motor insurance pricing continues to harden, with a 35% increase year-over-year in February.
The analysts write, “Our UK motor insurance tracker shows that premiums are +35% higher YoY in February and +3.4% higher versus the prior month.
“Whilst this is encouraging, it is worth noting that the market is still playing catch up.
“Market premiums fell 17% in 2020/21, and our tracker suggests that premiums have not sufficiently adjusted since to cover rapidly rising claims costs in 2021/22.”
Jefferies tracker shows that the pricing deficit relative to pre-pandemic margins remains.
The cumulative rise in claims (+27%) still exceeds premiums (+21%) since the start of 2019, implying that a pricing deficit exists relative to pre-pandemic margins.
To eliminate this deficit, the analysts believe that insurers need to increase premiums a further +6% over and above claims severity inflation, which they note would get margins back to pre-pandemic levels (on a written basis).
Further, Jefferies states that whilst market conditions need to improve before it turns more positive on the UK motor insurers, it acknowledges that the sub-sector is defensive to the current economic climate.
The analysts write, “With the market focussed on the wider risks of a run on the assets in financials, we have considered the risks on insurers. Whilst motor insurance policies are cancellable, we believe motor insurers are fairly well insulated from any liquidity risk.
“In the case where motor insurance policies are paid in instalments, liquidity risk is limited; future premiums are no longer payable and the ongoing insurance cover ceases. Where insurance policies have been paid upfront (and therefore have a cash value), cancellation does not occur at zero cost to the policyholder.”
They continue, “Any cash refund will be net of cancellation fees, the insurance cover will stop, and given the mandatory nature of motor insurance in the UK, the customer will no longer be able to use their car.
“Therefore, the risk of a run on the assets for a motor insurer is low in our view. In addition, exposure to Credit Suisse and AT1s more generally appears to be limited amongst the listed UK motor insurers that we cover.”
Jefferies suggests that a major driver of the elevated claims inflation in 2022 was a result of rapidly rising costs for second-hand cars in the second half of 2021 and early 2022.
According to the analysts, this impacts the severity of total loss settlements for motors insurers.
The elevated inflation on second-hand cars was largely due to supply-chain issues arising from a semiconductor shortage, which the analysts say does not appear to have gone away.
In addition, vehicle manufacturers continue to face disruption, according to S&P Global Mobility data, with light vehicle production volumes depressed by an estimated 266,401 units in Q1 2023.
