Among the many price increases UK consumers have experienced in recent years, the rising price of car insurance has been one of the most dramatic.
Between May 2021 and June 2024, the price of consumer goods and services in general rose 21%. By comparison, the quoted price of car insurance rose 82%.
And while consumers may be able to change some spending habits to avoid price rises, there often isn’t an alternative to buying car insurance. Car insurance is mandatory for drivers and seven in 10 UK adults say their lifestyle requires having a vehicle, according to the market research company Ipsos.
This Insight explores potential reasons for the increase.
A low baseline in May 2021
Part of the reason why prices have increased so much in relative terms is that they started from a low base, having fallen 16% between March 2020 and May 2021. This had left premiums at their lowest level since late 2015.
Professional services firm EY explains that covid-19 lockdowns reduced the amount people used their cars, and so the number of accidents they had. The number of cars involved in collisions in Great Britain fell from 158,000 in 2019 to 117,000 in 2020.
This meant insurer profits went up as they had to pay out for fewer claims, allowing them to lower premiums.
So, some of the price rise since mid-2021 has been a reversal of these price falls, as road usage has returned to normal levels, along with the volume of claims.
Cost pressures after the pandemic
As we emerged from the pandemic, there were also particular cost pressures that pushed up the price of insurance further.
Availability of spare parts
One of these pressures was the increased cost of spare parts, which was driven by low supply. For example, in 2021 a shortage of semiconductors affected car manufacturing and in spring 2022 lockdowns in Chinese manufacturing bases like Shanghai and Guangdong affected the supply of various parts.
Even into 2023, there were reports that manufacturers were trying to keep what parts they had for new cars, rather than for the repairs market. In February 2023 the Association of British Insurers (ABI) reported that an estimated 40% of insurers’ work was being affected by parts delays.
These delays have a knock-on effect when insurers are obliged to provide policy holders with courtesy cars for a longer period while their car is being repaired.
Energy prices and the conflict in Ukraine
Another factor increasing the cost of repairs is the war in Ukraine which, along with heightened demand following the pandemic, caused wholesale gas prices to spike. This increased the market prices of both gas and electricity, and in February 2023 the ABI reported energy inflation added around £72 to each repair.
Costs of repairing more sophisticated cars
The ABI also says that it costs more to repair modern cars, which are increasingly complex, and electric vehicles which are becoming more popular. It notes car thefts have risen in recent years according to official crime survey and recorded crime data.
Anticipation of future costs
Finally, car insurers point out that when they price their policies they have to consider their likely future costs, rather than the current cost of paying out for claims. This might cause car insurance inflation to rise quicker than inflation across the economy if they expect higher future costs.
One thing that doesn’t appear to be behind the rise in prices is insurer profits. According to EY, for the past two years car insurers have had higher operating and claims costs than they have earned through premiums, though EY expects insurers to be profitable in 2024, as shown in the chart below.
European parallels
There are good reasons to explain why car insurance has increased so much in the UK. But the picture in the EU appears quite different despite facing similar global cost pressures. Ultimately, there’s still not a full understanding of why prices have apparently changed so much in the UK compared with the EU.
Lower insurance inflation across EU countries
Data from Eurostat (in the chart below) shows that car insurance has increased 19% in the EU compared with 82% in the UK in the three years since May 2021, despite general consumer inflation being very similar (20% in the EU vs 21% in the UK).
Part of this may be explained by the fact that EU insurance prices did not fall during the pandemic as they did in the UK, and so have increased from a higher baseline.
It might also be partly because in 2022 the UK banned insurers from charging renewing customers more than new customers. There’s evidence this caused prices to rise faster for new customers than for renewals. As the UK statistics only measure new customer quotes they may overstate price rises across the whole sector.
Potential differences in how insurance data is collected
The industry has noted that its own statistics, based on what it says customers actually pay for car insurance, show lower price rises than the Office for National Statistics (ONS) quote-based data. In the second quarter of 2021 the ABI said prices fell to a five-year low, averaging £430 for comprehensive cover. By the second quarter of 2024 it had risen to £622, up 45%, rather than 85% according to the ONS.
There are also questions over the comparability of the EU and UK inflation data. The EU doesn’t specify every detail of how member states collect price data, and some (like Poland) use transaction data alongside quotes. But we don’t know how widespread this is or its effect on comparability.
Government and regulatory action
In recent years the government has taken some action to reduce premiums, such as removing a requirement that car insurance covers driving on private land and changing how whiplash claims are processed.
As mentioned, the industry regulator, the Financial Conduct Authority (FCA) has also banned firms from charging returning customers more than new ones, though does not cap the price of insurance.
However there have been calls for the government and the FCA to go further. In a Commons debate in February 2024, the DUP’s Carla Lockhart MP suggested young drivers’ rights to drive could be limited to reduce their accident risk and so premium levels.
And ahead of the 2024 general election, the Labour Party indicated it would ask the FCA and the Competition and Markets Authority (CMA) to look into price rises in the sector.
What these reviews might recommend is uncertain, but with EY forecasting further price rises this year, historically high insurance costs are likely here to stay.
About the author: Abbas Panjwani is a senior researcher at the Commons Library specialising in financial systems and consumer finance.
Photo by Matt Palmer on Unsplash