The cost of car insurance has soared by 43 per cent on average in the last 12 months alone according to the Office for National Statistics, and some motorists are now reporting that their bills are now over double what they were paying the previous year.
Now the average bill is now £511, according to the Association of British Insurer (ABI), and the industry has blamed inflation and increased repair costs for the steep increase in costs, which are expected to continue.
Some are concerned that drivers could be priced off the road if costs continue to increase. Louise Thomas, car insurance expert at Confused.com, said: “If prices continue at this rate then there’s no doubt drivers could be priced off the road, as they battle with other rising costs too.”
So, what is to blame for this rocketing costs? We speak to experts to find out what has happened.
Inflation
Rory Yates, a global strategic lead at insurance platform provider, EIS, said insurers could do much more to help customers when it comes to bringing down the price of their plans.
“Although inflation is an issue for insurers, many are passing on more than this additional cost to their customers.
“Claims inflation is a lot higher than core inflation for car insurers because the costs of claims have risen far more dramatically. As poor economic conditions bite, fraud and opportunistic fraud in particular have risen.”
The ABI said the cost of vehicle repairs increased by 33 per cent over the year to £1.5bn, reflecting rising costs, including energy inflation.
Although inflation has been high for two years, there is a lag in the impact being felt – because of supply lines and pricing for parts happening in advance – which is why drivers are only now seeing higher bills.
Yates added: “Insurers also price with forward thinking in mind, taking into account how much inflation could potentially rise in the future.”
The lack of transparency surrounding car insurance policies could be a factor in the hikes, other experts say.
Pete Ridley, car finance expert at Car Finance Saver, said: “While insurers are facing legitimate cost pressures that have led to higher premiums, there is a concern that some may be passing on more of the costs than necessary, potentially leading to inflated prices.
“Insurers may also be looking to recoup losses from previous years, contributing to the significant increases seen recently. The lack of transparency in insurers’ risk models and potential increases in claims following the pandemic have been cited as factors contributing to the pricing decisions.”
Brexit
Aside from inflation, the impact of Brexit has led to supply chain issues.
Shortages of semiconductors and other materials needed for vehicle repairs have driven up repair costs.
Ridley said: “The scarcity of new cars due to production disruptions during the pandemic has increased the prices of both new and used vehicles, affecting insurance costs.”
Yates believes insurers could handle certain pressures better.
“The supply chain cost issues driving a lot of the claims inflation could be handled better, creating systems which improve data flow throughout the repair and claims process, reducing costs, for example, placing vehicles in the right garage with the likely best chance of best resolution for all parties and dramatically improving customer experiences.
“Garages don’t tend to be as visible as shops or post offices, for example, so people don’t notice when they disappear. But lack of supply and increased demand has led to long wait times for repairs even though people are paying increased costs.”
Currently, the average age of a garage owner is 65. Many of these owners are likely to decide to give up the business when they retire alongside many shutting down in the pandemic when less cars were on the road.
The number of bodyshops has fallen by over 20 per cent over the last decade.
“If insurers worked better with the repair network, they might find a better solution than sending people either to their local garage with a two week wait when they could go to one slightly further away and have less of a wait, utilising resources better and ensuring drivers get better value for money.”
Policy changes
Another factor is the “loyalty premium” ban – in January 2022 the Financial Conduct Authority (FCA) banned car and home insurance providers from charging existing customers more to renew their policies.
This has led insurers to increase the prices of their core products to make them more profitable.
Additionally, as driving habits return to normal post-pandemic, the number of claims has risen, resulting in higher claim costs for insurance companies. This increased frequency and severity of claims contribute to higher premiums.
Electric vehicles
The rise in popularity of electric vehicles is also contributing to higher insurance costs.
These tend to have more sophisticated machinery and are therefore more costly to repair. The higher cost of repairs is being spread across the board to motorists, Yates said, as opposed to just EV owners.
“When we are seeing collisions with these types of cars, there appears to be more costly damage leading to a higher cost for repairs.”
Additionally, large insurers including Admiral are upping their prices which led to other insurers also increasing theirs. It hiked prices by 20 per cent during the first half of the year, something that led to a mass exodus of customers but also other insurers raising their prices.
He believes that the Government needs to intervene before prices get even higher.
“This is a far more complex issue than merely simple economic inflationary impact and needs addressing at a government level. There are things insurers can and should do, but there are things that need addressing elsewhere. The time for collaboration is already overdue.”