In the UK commercial motor market, economic inflation is likely to exacerbate existing and emerging issues associated with claims inflation that have been causing upward pressure on insurance rates for some time.
The reasons behind claims inflation have been well documented – more advanced technologies in vehicles leading to more expensive repairs in the event of an accident, supply chain issues in repair networks linked to both the pandemic and the Ukraine conflict, labour shortages – especially in the electric vehicle segment - and rising personal injury claims costs, for example. The purpose of this article is not to delve into those – other documents, such as AXA’s ‘Guide to Motor Claims Inflation’1 can provide more detail on some of these factors.
Inevitably though, rising economic inflation – mainly affecting repair networks - is adding to those cost pressures and is likely to feed through into insurance pricing.
We see these pressures arising in areas such as the cost of parts – not only some of the higher technology components now more widely used in vehicles, but in basics such as paint.
Energy costs2 are clearly also a factor, affecting all links in the supply chain from manufacturers to body shops, to insurers themselves. Furthermore, the combination of labour shortages and wage inflation means that labour rates are typically rising.
Then, there are worsening exchange rates to take into account: in 2020 the UK motor trade imported just over £9 billion in parts, according to the Society of Motor Manufacturers and Traders 2021 Automotive Trade Report3.
And another cost of living-related factor that could impact prices is the knock-on effect from a higher propensity for fraudulent claims. Recent history suggests that recession leads to a 25% increase4 in fraudulent claims in both commercial and personal lines. While the potential for spurious whiplash claims has been partially shut down by the Ministry of Justice reforms that took effect in mid-2021, there are worrying signs of a rise in tinnitus claims5 that could end up translating into higher premiums for all.
Potential impacts
So how might owners of commercial vehicles and fleets expect these factors to affect insurance prices? Clearly, individual cases will depend on location, usage, claims history and so on, but we can give you a feel based on our dealings and conversations across the market.
Claims inflation is widely stated to be around 10% for both third party and own damage losses so insurers are suggesting rating will need to increase into 2023. As ever, views vary, some insurer's may suggest increases for inflation alone need to be 10-15% (so ignoring the claims performance), others may be in the 5-10% range.
If we put that in the context of what has happened so far this year, we have seen commercial vehicle insurers targeting rate increases of 5-10% increase across their portfolio, compared with what we’ve observed as a consistent average annual increase in the London market of 3-4% over prior quarters.
Something else on insurers’ radar, in which inflation may play a part, is that the Ogden Rate (the discount rate applied to long-term injury awards paid using PPOs - periodical payment orders) is due for review by 2024. This process will start next year and the feeling from some is that the current -0.25% discount rate could reduce to anything as low as -1.5%. This would increase the settlement cost of a long-term injury award significantly.
How can commercial vehicle owners respond?
- Clarity and quality of information, specifically around proactive risk management and future plans (such as transition to electric vehicles) can significantly improve your and your broker’s negotiating position.
- Effective management of driver behaviours – driver training, in-vehicle coaching and better data capture, including the use of telematics, should help companies manage fleets more safely and efficiently and control insurance costs.
- Work with your brokers to enhance Claims First Notification of Loss procedures (since speed can help avoid the cost of claims spiralling) and claims defensibility (analysis that helps identify and reduce the number and severity of future claims).
To find out more, please get in touch.
Footnotes
1 AXA’s ‘Guide to Motor Claims Inflation’
2 Energy costs
3 Society of Motor Manufacturers and Traders 2021 Automotive Trade Report
4 Recession leads to a 25% increase
5 Rise in tinnitus claims
Author
Barry Stonebridge
Commercial Motor Lead
FAQs
Impact of inflation on insurance
How does inflation affect the insurance industry? ›
Inflation is causing the costs of housing materials, car parts, and labor to increase. These factors result in higher insurance rates for homeowners and drivers. To lower premiums, homeowners can explore discounts, maintain a good driving record, and bundle policies.
Why are commercial insurance rates going up? ›
The continued impact of catastrophic events is a major factor driving up costs, along with the increasing cost of capital, financial market volatility and inflation. This is an expense carriers need to pass along to customers.
What does inflation do to car insurance? ›
Auto insurance rates are impacted by inflation in multiple areas of the automotive industry, including vehicle values, labor costs, the price of replacement parts and health care costs.
Why are insurance premiums so high now? ›
The main reason why car insurance is becoming more expensive is that the number of accidents is increasing nationwide, leading to more insurance claims.
What is the inflation clause in insurance policy? ›
Insurance inflation protection is a feature of some insurance policies whereby future or ongoing benefits to be paid are adjusted upward with inflation. The goal is to ensure that the relative buying power of the dollars granted as benefits do not erode over time due to inflation.
What is the inflation option in insurance? ›
It refers to a feature in some health insurance policies where the policyholder can decide whether or not their sum insured amount will be automatically increased each year to keep up with inflation.
What is the average commercial insurance increase in 2024? ›
Overall commercial property/casualty premiums increased slightly for all account sizes to 7.7% on average in the first quarter 2024.
Why is commercial vehicle insurance so expensive? ›
Your industry may affect the cost of commercial auto insurance because some industries face more risks than others. Your industry will also determine what type of vehicle you use for work and how much equipment you drive around with, which can impact your cost for insurance.
Why is commercial truck insurance so high? ›
Safety Measures and Driver Record
Insurance companies tend to look at the past three to five years of a truck driver's history when coming up with their premiums. Truck drivers who have a history of traffic violations and/or accidents on their record will lead to a higher rate because of the perceived increase in risk.
One reason is increased costs in other sectors. “The cost to repair vehicles, you know if you think of labor, parts, the cost of fuel to deliver those parts to places, all of those have experienced a lot of increase in the last couple years,” Newbill said.
Are insurance premiums in CPI? ›
The Consumer Price Index (CPI) for health insurance measures the price of health insurance services directly provided by insurance companies, but it excludes the price of indirectly purchased medical goods and services, which make up the majority of total premiums.
Have car insurance rates gone up in 2024? ›
Car insurance costs continue to rise. According to a report from Bankrate, average premiums for full coverage auto insurance hit $2,543 in 2024, a 26% increase from 2023.
Why is full coverage so expensive? ›
A full-coverage policy costs two and a half times more than one with minimum liability coverage only. That's because full coverage typically includes comprehensive and collision insurance. These coverages pay to repair or replace your car if it is damaged.
What factor affects insurance premiums the most? ›
Common rating factors include age, location, driving history, credit score, and more. Put simply, the less risky your rating factors are, the cheaper your car insurance policy will be. Some auto insurance rating factors — such as driving record or vehicle type — have relatively sizeable impacts on car insurance costs.
Why is Allstate so expensive? ›
Why is Allstate so expensive? Many factors contribute to Allstate being expensive, including rising costs for insurance companies and the way it pays its agents. Damage claims and payouts also factor into its higher-than-average rates.
How does social inflation affect insurance? ›
Issue: Social inflation is a term that describes how insurers' claims costs are increasing above general economic inflation. This is generally thought to be due to a trend in increasing litigation costs brought by plaintiffs seeking large monetary relief for their injuries.
How does inflation affect life insurance sales? ›
Buying a new policy during high inflation
Like other consumer products during severe inflation, the cost of new life insurance policies may go up. But holding off until prices level out isn't necessarily the best move. If you die without coverage, anyone who depends on your income could be left in a financial bind.
How does inflation affect policy? ›
Inflation Targeting
If prices rise faster than their target, central banks tighten monetary policy by increasing interest rates or other hawkish policies. Higher interest rates make borrowing more expensive, curtailing both consumption and investment, both of which rely heavily on credit.
How does inflation affect health insurance? ›
American families will soon face a large increase in healthcare costs driven by medical inflation combined with companies increasingly moving employees to higher deductibles and out of pocket plan designs. Healthcare insurance costs are expected to leap from 5.4% to 8.5% in 2024 due to medical inflation[1].
