In recent years, car insurance premiums in the UK have experienced a noticeable upward trend, as highlighted by the Association of British Insurers (ABI). This increase can be attributed to a confluence of factors, ranging from changes in government policies and regulatory frameworks to shifts in societal and economic dynamics. To comprehend the reasons behind this surge, it is essential to delve into the various contributing factors shaping the landscape of car insurance in the UK.
One significant factor influencing the rise in car insurance premiums is the evolving landscape of personal injury claims. According to the ABI, the cost of motor insurance claims has been on the rise, driven primarily by an increase in the number and value of personal injury claims. This is particularly evident in the context of whiplash claims, where individuals seek compensation for neck and back injuries resulting from road accidents. In an effort to address this issue, the government implemented reforms to the legal framework surrounding whiplash claims, aiming to reduce the frequency and cost of such claims. However, the impact of these reforms on insurance premiums is a complex and ongoing process.
Additionally, advancements in vehicle technology have led to higher costs associated with repairing or replacing damaged vehicles. Modern cars often feature sophisticated safety and connectivity systems, which, while beneficial for driver safety, can substantially increase the cost of repairs following an accident. The ABI notes that the cost of vehicle repairs and replacement parts has been a key driver of the overall increase in insurance premiums.
Another contributing factor is the Insurance Premium Tax (IPT), a tax levied on general insurance premiums, including car insurance. The ABI has been vocal about the impact of successive increases in IPT on the affordability of insurance for consumers. Since its introduction, the IPT rate has been raised multiple times, adding to the financial burden borne by policyholders. The government could help ease the financial burden by reducing this rate at the looming autumn statement mini-budget.
Moreover, societal changes and economic factors play a role in shaping the car insurance landscape. The ABI highlights the impact of changes in the discount rate used to calculate compensation for serious personal injury claims. A reduction in this rate, as witnessed in recent years, leads to higher compensation payouts, further contributing to the upward pressure on insurance premiums.
Statistically, the ABI reports that the average price paid for comprehensive motor insurance in the UK increased by 29% in 2022. According to their data, the average premium paid in the first quarter of 2023 was higher than the average for the whole of 2022. The body highlighted a study by accountancy giant EY that showed for every £1 motor insurers received in premiums last year, they paid out £1.10 in claims and operating costs.
Mervyn Skeet, director of general insurance policy at the ABI, said: “We appreciate that another quarter of increased motor insurance premiums will be concerning for households who are already grappling with rising costs in other areas.
“Insurers continue to do all they can to keep motor insurance as competitively priced as possible, despite facing substantial increases in costs outside of their control.”