The price of preventing homes, vehicles, and other valuables from being lost or damaged has increased due to insurance firms’ actions.
This year’s record high for motor insurance costs resulted from a 61% increase in premiums in the 12 months leading up to August. It is anticipated that they will not level off until 2025.
The cost of home insurance, which includes both buildings and contents coverage, is predicted to increase by 36% over the next two years and by 17% this year, according to accounting company EY.
FT Money investigates cost-increasing factors and potential solutions.
Why have premiums increased so quickly and significantly?
The insurance sector is being severely impacted by supply chain, labor market, and inflation issues, just like many other industries.
LV= reports that labor and energy expenses have caused a 46% increase in vehicle repair prices, while courtesy cars—which are used by customers in the event that they require a replacement vehicle—have grown by 52%.
High-tech elements like cameras, sensors, and high-voltage systems in cars are also more difficult to replace and demand specialized labor. Since paint costs have increased by 20%, margins are being negatively impacted by paintwork, which is a need for the majority of claims.
According to Martin Milliner, director of claims at LV= General Insurance, “premiums fell during the Covid pandemic due to reduced claims volumes, but are now back to normal levels and we’re seeing a catch up of three years of underlying inflation.”
The cost of building homes destroyed by fire or flood has increased due to supply chain issues, and insurance premiums are rising as a result of an increase in the frequency and intensity of weather catastrophes worldwide.
In the UK, hurricanes Dudley, Eunice, and Franklin resulted in 170,000 claims for property damage and £473 million in settlements last year. The consumers most likely to be harmed are those who reside in severely damaged areas.
“Thunderstorms can occur anywhere, but if you live on a flood plain, your insurance premiums will increase significantly,” stated Paul De’Ath, Oxbow Partners’ head of market intelligence.
When will they likely start to descend once more?
Huw Evans, a partner in KPMG’s insurance group, stated, “It’s important to remember that there is always a market cycle in insurance.”
“The market appears to be leveling off, but I don’t think a softer market will emerge again until maybe 2025.”
If supply chain problems go away and more used cars become available, or if geopolitical flashpoints like the conflict in Ukraine calm down and oil costs drop, pressure on premium prices may decrease.
Moreover, the ability of central banks to control inflation will be crucial.
Has the restriction on the loyalty penalty worked?
Insurance firms are prohibited from charging renewing clients more than new ones who pose the same risk because of the “loyalty penalty” restriction.
The Financial Conduct Authority discovered in 2018 that if policyholders had been charged the average price for their risk, 6 million of them would have saved £1.2 billion. Customers were frequently forced to shop around for new insurance each year as a result.
Although the ban was implemented in January 2022, it is difficult to determine if consumers would have benefited from savings in their absence given the other issues plaguing the business.
Oxbow research indicates that insurer profits have been strained due to the combination of the prohibition and high inflation. As a result, increases in both new and renewal rates are predicted in the future, which will result in a “marked increase in average premium.”
How do customers take action?
Even if users of comparison websites can discover that they are currently unable to get a better offer, experts advise them to attempt several and take other options.
Your insurance company’s assessment of your risk profile may increase your premiums, and you may receive a different estimate from another provider.
Also, if you choose a greater excess, you will be required to pay a higher amount in the event that you make a claim. For example, your insurance provider will pay you £800 if you make a £1,000 claim and your excess is £200.
Your rates will decrease the larger your excess, but you must be able to pay for the excess. You might not be able to make a claim at all if you can’t. For an excess, some experts advise ring fencing the amount you would require.
If you use your automobile on public roads, you must have insurance; however, if you think you won’t need it, you can choose not to have add-ons like legal and key protection.
If you don’t drive frequently, you might also look into pay-as-you-go insurance or become a member of a vehicle club.