UK car insurers' margins are expected to deteriorate significantly unless they raise their premiums over and above last year’s prices, analysts have warned.
Claims inflation is accelerating at an unprecedented pace, leaving UK motor insurers exposed, according to analysts at financial services company Jefferies.
Its analysts said in an equity research paper today that insurers will need to hike their insurance premiums by 16%, year over year, to achieve margins comparable with 2019.
Jefferies estimates that claim costs are now 6% more expensive in 2022 than before the pandemic.
However, a drop in the price of premiums last year means insurers will need to elevate their charges even higher than that to generate comparable returns.
“To maintain the same margin as was achieved in 2019 (in this case we have assumed 80%), insurers need to increase premiums by +6% compared to 2019 levels,” said equity analysts James Pearce, Philip Kett and Minh Duong in a paper entitled ‘UK Motor Insurance: Road to Nowhere’.
“In 2021, premiums were actually 8% less than they were in 2019, such that premiums actually need to rise +16% YoY in 2022 to achieve 2019 margins.”
In real terms, they estimate that pricing at major UK motor insurers would “likely have to increase even further”.
Jefferies, therefore, forecast a “significant deterioration in insurer margins across the market”, estimating that the market’s combined ratio will rise from 97% last year to 116% in 2022.
The broker said it has 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).
It said claims severity inflation appears to be “well ahead of motor insurance rate changes”, with new business premiums up 9% in May compared to a year earlier, according to its tracker.