A new UK government has several options to cut claims costs if it is determined to crack down on motor insurance prices, industry experts said.

The Labour Party, which polls suggest is most likely to emerge victorious in the UK's July 4 general election, said in its manifesto that it would support the country's drivers by "tackling the soaring cost of car insurance." Labour member of Parliament Louise Haigh, the shadow transport minister, told UK newspaper The Mirror that the Financial Conduct Authority and the Competition and Markets Authority should investigate the industry.

Another UK main political party, the Liberal Democrats, fourth in the running according to the BBC's poll tracker as of June 24, pledged in its manifesto to "protect motorists from rip-offs, including unfair insurance and petrol prices."

Levers to pull

Among the actions the new government could take is raising the personal injury discount rate, also known as the Ogden rate, said Graeme Trudgill, CEO of insurance broker trade body the British Insurance Brokers' Association.

This rate — which the Lord Chancellor, a senior member of the government's cabinet, sets in England and Wales — determines how much insurers can adjust payments to severely injured claimants to account for the returns claimants make from investing their payouts. However, the discount rate has been in negative figures since 2017, partly because of low interest rates at the time, meaning insurers must pay out more than awarded rather than less. The discount rate is currently set at negative 0.25% in England and Wales, negative 0.75% in Scotland and negative 1.5% in Northern Ireland.

The difference the rate makes to claims is "absolutely enormous" and can be in the millions of pounds for the more serious claims, Trudgill said. A review is scheduled for 2024, and the Ministry of Justice is working on the process "but it needs to be prioritized," Trudgill said. "There has to be a change there if they want a change in premiums," he said.

Another area for attention could be the conduct of business rules for claims management companies, which Trudgill said don't "go far enough." He added that there was "no requirement to try keep costs to a sensible, fair level." He cited statistics from the Association of British Insurers showing that vehicle repair costs increased by 31% and the cost of providing temporary replacement vehicles increased 35% in 2023 compared with 2022.

A new government might want to take another look at a long-running problem of inflating subrogated motor insurance claims, said Paul De'Ath, head of market intelligence at insurance consultancy Oxbow Partners. In a car accident, the claims of the not-at-fault driver are paid by that driver's insurer, which in turn recoups the cost from the at-fault driver's insurer. In such cases, the not-at-fault driver's insurer will typically be more lenient with claims cost controls than if paying the claim themselves. Insurers acknowledge the problems with this practice but continue because stopping unilaterally would mean losing out to others that carried it on.

Rising prices, falling profits

The average price for comprehensive personal motor cover was £994.73 in the fourth quarter of 2023, up 58% on the £629.11 for the same quarter of 2022, according to the WTW/Confused.com price index. The spike was driven by a surge in claims costs as prices for energy, labor, vehicle parts and second-hand cars rose rapidly because of economic inflation and supply chain problems caused in part by the Russia-Ukraine war.

The rise in claims costs have also hit insurers' motor underwriting profits. UK insurers' combined ratio for both motor liability and other motor was above the 100% break-even mark in every quarter of 2022 and 2023, denoting an underwriting loss in those lines, according to Bank of England data.

Prices jumped so much in 2023 because, even though insurers were hit with rising claims costs in 2022, the introduction of the Financial Conduct Authority's general insurance pricing practices, which banned insurers from charging cheaper prices to new customers and ratcheting up the price for renewing ones, confused the picture, said De'Ath.

"It was much more difficult to work out what you were doing with pricing because you were trying to equalize your renewal and new business books at the same time as … the market got hit by inflation," said De'Ath. As a result, average prices according to the Association of British Insurers' index did not rise in 2022, so in 2023, "you had two years' worth of inflation coming through in pricing," he said.

Some in the insurance industry have bristled at the Labour Party's pledge to crack down on motor insurance pricing. Amanda Blanc, CEO of Aviva PLC, said the plans were akin to using a "sledgehammer to crack a nut," the Financial Times reported.

Even so, the industry acknowledges its role in tackling claims costs.

The Association of British Insurers declined to comment on political parties' manifesto pledges on motor insurance pricing more broadly, but in a statement on Labour's Plan for Drivers, the association's director of general insurance policy, Mervyn Skeet, said it was "entirely committed" to supporting drivers and taking "clear, practical steps" to help tackle the cost behind motor premiums and improve road safety.

The association, said Skeet, supported Labour's Plan for Drivers, which aligned with its 10-point road map for tackling insurance costs and includes initiatives to combat vehicle theft, fraud and uninsured driving, and reduce the effects of the personal injury discount rate.

Market forces

Because UK personal motor insurance is highly price competitive, in no small part because much of the business is sold through price comparison websites, a reduction in claims costs should trigger price falls. "If you can genuinely reduce the cost of claims, then the prices for the customer should come down," De'Ath said.

In addition, the current period of rapid price rises could be drawing to a close without intervention. Car insurance prices fell 5% quarter over quarter in the first quarter of 2024, according to the WTW/Confused.com price index.

The general sense from insurers is that most feel they have now done the heavy lifting on pricing, assuming inflation stays where it is, De'Ath said. "We would expect that through most of this year, players will be increasing prices slightly just to maintain their margin versus claims inflation," he said.

Insurers are cautious about price reductions, De'Ath said, in case there is a sudden spike in inflation and claims costs, which would leave them playing catch-up again. But he added: "Once it starts going, it can move relatively quickly on the way down as well as the way up."

Beyond personal lines, London's international insurance market, made up of Lloyd's, the London company market and the brokers that place business with them, also has demands of a new government.

One frustration for the London Market Group, a trade body representing this part of the market, was that a consultation on a new UK captive insurance regime, promised in the current government's Autumn Statement in November 2023, did not emerge before the election was called and all activity paused, according to Caroline Wagstaff, the London Market Group's CEO. The aim is that business that would otherwise go offshore would remain in the UK.

"The captives consultation is absolutely number one on my priority list," Wagstaff said in an interview. "We think the work has been done. We think it's poised ready to go."