The insurer needs to estimate risk so it can collect enough money to be able to pay out to those that need it. The premiums of the many cover the claims of the few.
We’re also in a period of high inflation. This means it's getting more expensive to fix that damaged bumper, replace items stolen in a burglary or to pay for a poorly pet’s surgery. So given the vast majority of your insurance premium goes to pay these claims, if costs go up then it’s likely premiums will need to rise accordingly. Broader systemic trends, such as insurance premium tax, the personal injury discount rate, increasing car theft, rising car prices and higher repair costs, can also influence motor insurance premiums.
Having listened to questions from insurance customers we have tried to answer the most common queries below, as simply as possible.
FAQs
Is the cost of insurance going up, and if so, why?
The cost of some insurance is rising. We collect data from its members on what they charge and over the last year the average motor premium has risen by 29% (Q3 22 to Q3 23).
When it comes to motor cover, the recent premium price increases have been driven by a spike in the cost to pay claims. These costs have risen at rates significantly higher than average inflation. In fact, while premiums are up 29% in the last year, the cost of paying claims is up 21%. Noting that the overall number of claims settled, at 570,000, rose 5% on the same quarter last year.
Price rises have been driven by claims cost inflation with EY estimating that in 2022 for every £1 paid in premiums, insurers incurred £1.11 in claims and expenses. They now estimate that this figure rose to £1.14 in 2023.
Even without taking recent inflation into account, the cost of vehicle repair has been steadily increasing. This is largely due to vehicles being much more sophisticated nowadays. A new car typically features an array of cameras, sensors, and screens that are expensive to repair and replace. And such sophisticated technology requires people with the associated technical skills to do the repairs, which can be in short supply, pushing up costs further.
Supply chain issues are also increasing the costs to settle claims and therefore what needs to be collected through premiums. For example, if it takes just a few days longer to receive a part for a vehicle awaiting repair, that’s three more days that the insurer may need to provide a temporary replacement vehicle to the driver.
Average home insurance prices haven’t risen to the same degree though. This is because home claims are much more impacted by big weather events like storms, floods or dry summers (which can cause subsidence). 2021 was relatively mild for such things in the UK, so premiums were lower than they might otherwise have been. But 2022 saw several storms (Dudley, Eunice and Franklin), a record-breaking summer heatwave and a cold snap in December. So, we could see these events impact the cost of home premiums this year, though insurers will strive to price as competitively as possible. Inflation of cost of materials and goods will also likely have an impact. For example, rebuilding a roof after storm damage or replacing stolen items after a burglary now costs more than they did before.
Motor and home insurance also incur a flat rate of 12% tax, known as insurance premium tax (IPT). This means that as the costs of cover increases in £ terms, that 12% accounts for a greater addition that drivers and homeowners have to stump up for. We don’t feel that IPT is a fair tax, as it’s punishing a responsible and often mandatory purchase. You can read more about our views on IPT here.
Finally, it’s worth adding that insurance is a competitive market. It is always worth shopping around to see if you can get different cover that is right for you at a better price.
What does insurance price reform have to do with my premium?
Supported by the ABI, the FCA changed the rules for insurance providers in how they price policies, preventing them from offering introductory rates solely to new customers (possibly subsidised by higher prices for existing customers). New and existing customers now have to be priced in the same way. You may have heard of this as banning the practice of ‘price walking’.
This is to safeguard customers who are less savvy at switching, ensuring they aren’t penalised for their loyalty. For example, older or vulnerable people who tend to be less comfortable using online comparison sites.
We believe this is a fairer way to price an essential product like car or home cover, and most of the public (75%) agree that this as a fairer way to price insurance.1
So, if you’re someone who switches every year, you might not see the same savings as you once did, although shopping around is still likely to be beneficial in a competitive market.
This reform led, in part, to a narrowing of prices for new and existing customers. In 2022, the average price paid to renew an existing policy fell by 7%, while the average price paid for new cover rose by 11%.
1. Research carried out by Opinium Research for the ABI – April 2023. 75% of 2,000 respondents support the General Insurance pricing reforms. Only 4% opposed the changes.
How can my insurance be more expensive than the car itself?
Take a look at the graphic below, showing what your premium covers. The risks are many and varied but you will see that some of the cost is reflective of the risk of the insured driver causing injury to other drivers, their passengers, or a pedestrian. These types of accidents can run into the £ millions in very serious cases.
What information do insurers use to calculate risk?
Firstly, it’s worth stating that by ‘risk’ we don’t mean how safely someone drives, but simply the chances that that vehicle will be involved in a collision, stolen or damaged. These are factors largely outside of your control, such as your age, where you live and how many miles you need to drive.
Different insurance companies use different data to calculate risk. If you’ve ever filled in a policy application or price comparison site form, you’ll get a sense of the amount of data points some insurers collect and analyse to generate a quote.
How insurers calculate customer risk differs between companies and is an important and sensitive part of their business, but we’ve given some broad examples in further FAQs on this page.
Not unlike food manufacturers, insurers might list the data they use (ingredients) but not how they blend and combine them to calculate risk. That is their ‘secret recipe’ and valuable to that company. If every detail of how insurers calculate prices was made transparent to competitors, it wouldn’t be a fair market. Keeping insurers in healthy competition means they price as competitively as they can, which is ultimately better for consumers. The majority of Britons (70%) also support risk-based pricing, believing that riskier customers should pay more.2
2. Research carried out by Opinium Research for the ABI – April 2023. 70% of 1,549 respondents who have motor insurance support the concept of riskier drivers having to pay more than safer drivers, versus 5% who oppose
Why does my job matter? How does that indicate risk?
Your job is just one of many factors that insurers use to estimate potential risk. And some insurers place more emphasis on this factor than others. That’s why it’s important to shop around.
Insurers don’t have to reveal exactly why they view some jobs as riskier than others, but it’s often an indication of the time of day you might drive more often, and perhaps how you drive. Take two identical people... One is a teacher and the other a surgeon. The surgeon is more likely to work more variable hours, including night shifts, or have worked 12+ hour days. The surgeon could be higher risk if they’re more likely to drive late at night after a very long shift. If some insurers have seen higher claims from surgeons historically, they may adjust their risk view of this job and therefore the price offered for cover.
Again, it’s worth stating that different insurers will have different risk statistics associated with various data and the claims they have received, so some might put a lot of emphasis on employment, where others look more closely at other factors. So shopping around will often be beneficial. But remember, don’t be tempted to try selecting a different job that doesn’t match yours, it’s super important to be honest in your application as giving false information to your insurer could invalidate your cover.
What does my premium pay for?
Your insurance premium goes into a large pool that is drawn on as people make claims on their policies. The vast majority of this premium will go to another customer that has to make a claim, with the premiums of the many paying for the claims of the few. In very serious accidents, such claims can climb into the £ millions.
Here’s a reflection of how motor insurance premiums are used – showing the breakdown of all claims and costs incurred by insurers in 2021.
Injury
The largest element of what the pool of premiums pays for is bodily injury to other drivers, passengers, pedestrians or to the driver themselves.
That's because serious collisions mean life-changing injuries, with compensation sometimes running into the £ millions. Payments are substantial to provide the level of care needed for someone who has perhaps lost a limb or needs care for the rest of their lives.
Damage to the driver's vehicle
Accidental damage to the insured driver's vehicle.
Damage to other vehicles and property
Often known as 'third-party' damage.
Overheads
Staff costs, marketing, property, IT etc. are all required to run a sustainable business and provide appropriate customer service.
Theft
This covers loss and damage from theft or attempted theft of a vehicle. Or damage caused during theft or attempted theft from a vehicle.
Replacement vehicles
Many insurance policies provide temporary 'courtesy' vehicles for the insured driver or other drivers involved in the collision while those cars are being repaired.
Uninsured drivers
Usually the person at fault for the collision claims on their insurance policy. But if the person at fault was driving without insurance then there is a safety net provided by an organisation called the Motor Insurers' Bureau (MIB).
The MIB will settle the claim and pursue the uninsured driver for the cost of the loss. However, the MIB is funded by insurers, so associated costs do impact on the price of insurance for honest drivers.
Windscreens
Damage to windscreens including repair and replacement.
Is it worth shopping around if big discounts for switchers aren’t readily available?
It’s certainly worth shopping around. Insurance is a competitive market with various companies having specialisms with different types of risk or customer types. For example, some insurers might have more data on rural drivers and be able to price more competitively for people living in the countryside.
It’s especially worth shopping around if your circumstances change. Perhaps you have a new car, are driving fewer miles per year or have moved home. There will be an insurer out there for you based on these new circumstances. You might also feel that the service you’ve had from your insurer has been good or bad – which might impact your decision to stick with them. Similarly, some insurers offer multi-product discounts for having two or more products with them.
Not all insurance products from one provider are the same either. You can vary what is covered to increase or decrease your price. For example, if you never use your car to commute or for work, SDP cover (social, domestic and pleasure) will likely cost less. You can vary your voluntary excess and toggle add-ons like courtesy cars and windscreen cover, etc. It’s a little more work, but this way you ensure that the insurance you buy is just right for you and your circumstances.
Most importantly it’s a good idea to not buy on price alone, but to ensure that the cover you are buying is right for your needs.
Why are premiums for young drivers so high?
Drivers aged 17-19 make up 1.5% of licence holders but are involved in nearly 12% of fatal and serious crashes.3
The charity BRAKE has done research into why this might be the case, pointing to a number of factors such as young people’s level of brain development, over-confidence, and poor assessment of hazards. The Royal Society for the Prevention of Accidents (RoSPAs) has also shown that less experienced drivers have poorer visual awareness than more experienced drivers and display a smaller range of horizontal scanning of the road, look closer to the front of the vehicle, check their mirrors less and focus more on stationary objects than moving objects.
Some insurers recognise and encourage young drivers to use telematics (in-car devices monitoring driving) to record safe driving data which can lead to reduced costs for cover. Others encourage additional driver training - like Pass Plus - for the same reason.
3. Research from the RAC Foundation
Why can’t my insurer tell me why my price at renewal has gone up or down?
Insurers write thousands of such renewal letters to customers and much of this process is automated to streamline costs and be as competitive as possible. If each customer was given an individual explanation of exactly why their price had changed it would require thousands of more man hours and qualified staff, which would ultimately impact on cost. As such, the exact reason why a price might have gone up or down isn’t usually possible to include in renewal packs. However, as an industry, we are hoping that resources like this FAQ can help consumers better understand the complexities that go into pricing.
None of my circumstances have changed, my car is one year older, and I’ve still not claimed. So why has my motor cover price gone up?
We can understand why it might be frustrating or distressing to see prices rising when key factors such as your no-claims haven’t changed.
But recent premium rises in motor insurance have been driven by a sharp rise in the cost of claims, often at rates higher than inflation.
For example, the cost of vehicle repairs jumped 32%, with the cost of paint increasing 16%, spare parts up 11% and the cost of replacement cars increasing by 47%. These have been largely driven by the price of energy. These factors impact heavily what it costs to pay a claim for a theft or an accident. Paying claims for those customers that suffer a loss is the key part of an insurance policy.
Your quoted renewal price may also be impacted by reform in the way insurers price new and existing customers. See the below question for more details here.
Finally, as your price partly reflects the risks you face of having to claim in the future, it may be that your local area has seen more traffic accidents or thefts recently, which could mean your renewal quote is higher. Or it might be the case that your insurer’s data suggests the make or model of your vehicle has become riskier. Such factors are less likely to change quickly though, so should only account for a part of any changes, compared to bigger factors like inflation. There are also factors unrelated to risk to consider too, covered in our final FAQ below.
Are there any other factors, other than risk, that account for a quoted price for insurance?
Yes, the cost of doing business such as marketing and operational costs need to be paid for by insurers and if these rise it can impact on premiums.
Insurers might also change their appetite for certain customer groups (e.g. older or younger drivers) and look to increase or decrease the amount of customers they have in particular segments. This can help insurers diversify their portfolio by spreading the risk of lots of costly claims coming at once from a particular customer group. For example, an insurer might start to limit the number of properties it ensures in Manchester if it is already providing lots of cover in the area. This means that if there is a major flood in Manchester they aren’t over-exposed to this risk. These dynamics can alter the price that an insurer may charge, notwithstanding the calculation of the risk price.
Insurance Premium Tax
On top of what you pay in premiums, there is an additional 12% in insurance premium tax. You can read why we think this tax is an unfair levy on a responsible purchase.
A note on profits
Like all companies, insurers aim to make a profit so they can invest, grow and pay shareholders (or members in the case of mutual insurers). The average profit margin in motor insurance is fairly small (single digits %). Many insurers operate at a loss on motor cover to keep that customer, so they can offer customers other products like home, pet or travel insurance. Alternatively, an insurer can run at a loss on motor cover but recoup this through investment returns or policy add-ons.4 Last year (2022) many insurers ran at a loss, in terms of their motor insurance claims vs. premium income.
4. For more on insurer profitability see this report from the FCA (sections 3.33 to 3.47).
