UK car insurers' margins are expected to deteriorate significantly as they battle to keep pace with the rising cost of claims, analysts have warned.
Claims inflation is accelerating at an unprecedented pace, leaving UK motor insurers exposed, according to analysts at financial services company Jefferies.
They say rising insurance costs will do little to prevent worsening margins in the coming months.
Jefferies today revised down its expectations for three major insurers, Admiral Group Plc (LSE:ADM), Direct Line Insurance Group PLC (LSE:DLG) and Sabre Insurance Group PLC (LSE:SBRE), following its profit warning last week.
Admiral is now rated underperform with a target of 1,525p down from 2,300p, on the basis that commissions will be at “much lower levels” due to worsening margins.
Given rising claims costs, Jefferies said it expects Admiral to report a loss ratio for the year of 94%.
Jefferies has also put Direct Line shares on ‘hold’, revising its price target to 215p, down from 330p.
It meanwhile reduced its price target for Sabre to 120p, down from 230p.
This was after Sabre issued a profit warning last week that worsened its guidance to a combined ratio in the mid-90 % range, compared to 79.4% in 2021.
Due to hikes in the cost of motor parts and services, inflation affecting the cost of claims rose by about 12% in the second quarter compared to 8% last year, according to analysts.
This is a problem for insurers, most of which are failing to price in the rising cost of claims.
Its analysts estimate that motor car insurance premiums would need to increase 16% to achieve the sort of margins seen in 2019.
However, since the European regulatory framework Solvency II was brought in, insurers have “more robust balance sheets which can weather a longer period of poor margins” that may help them stave off a crisis, according to Jefferies.