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Motor Insurance Claims Costs Projected to Rise in 2025
Analysis from EY indicates that UK motor insurance claims inflation is projected to remain high in the next year, following record total payouts in 2024. Despite this, competitive market dynamics may lead to lower rates for policyholders, intensifying pressure on insurers’ profit margins.
Rising Claims Costs and Market Competition
EY analysts predict an approximate 6% increase in the average expense of motor insurance claims for both 2025 and 2026. This forecast factors in persistently high damage inflation and bodily injury inflation within the long-term range of 3% to 5%.
According to the Association of British Insurers, motor claims reached a historic high of £11.7 billion in 2024, with the average claim increasing by 13% year-on-year to £4,900.
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EY noted that the anticipated rise occurs despite a “substantial decrease” in the frequency of claims.
Factors Contributing to Decreased Claim Frequency
- Enhanced vehicle safety features
- Reduced speed limits
- Changes in workplace commuting patterns
- Increased insurance costs leading to reluctance in making claims
Vehicle warning: Motor claims inflation is likely to remain elevated despite a drop in the prevalence of claims, according to EY
Impact on Insurer Profitability
EY anticipates that motor insurers‘ margins will reach breakeven this year before falling to an underwriting loss of approximately 107% in 2026, as rate increases lag behind claims inflation.
A combined operating ratio (CoR) above 100 signifies that insurance firms are experiencing an underwriting loss, whereas a ratio below 100 suggests a profit.
In 2024, the UK motor insurance sector registered a CoR of 97%, despite claims payouts reaching a record £11.7 billion.
This figure still represents a significant improvement compared to the 113% recorded the previous year, when escalating claims, labor, and parts costs surpassed premium growth.
Changes in Car Insurance Rates
According to the Confused/WTW Motor premium index, new business rates in the UK car insurance market decreased by 14% to £757 last year.
The index also indicated that the rate of decline had slowed, from 7% in the first quarter to 2.6% in the subsequent three months.
WTW proposed that this deceleration could be attributed to heightened consolidation within the UK motor insurance landscape.
Recent Mergers and Acquisitions
Aviva is expected to finalize its £3.7 billion acquisition of Direct Line Group, which encompasses Churchill Insurance and vehicle recovery service Green Flag, in July, pending approval from the UK’s Competition and Markets Authority.
Additionally, Belgian insurer Ageas reached an agreement in April to acquire Esure from private equity firm Bain Capital for £1.4 billion, a deal that will establish the UK’s third-largest home and motor insurer.