Motor Claims Inflation at 10%, Says Direct Line

The latest update from Direct Line Insurance highlights the rising cost of repairs, and the knock-on effect on claims overall.

For consumers, it has to mean higher premiums from 2023 onwards in the Motor sector and those with hybrid and pure electric cars should – in theory – be paying more, since the weight of those vehicles causes more damage to people and other vehicles when impacted at the same speed as a smaller ICE car. Heavier battery cars also cost more to recover roadside, and store, since the lithium batteries pose a significant fire risk.

For Direct Line and many others in the Motor sector, the future surely involves more automated systems, more policy pricing driven by personalised and shared data, plus strategic partnerships on claims settlement and salvage. It might make sense for insurers to invest in acquiring salvage vehicles now since the reliable supply of spare parts from manufacturers seems unlikely to return – ever.

The current business model of outsourcing every part of the claims chain; recovery, storage, hire car, repair, battery storage and delivery of repaired vehicle, seems ripe for disruptive change given the new normal of wartime-like rationing of skilled labour and parts. The insurance industry may need to start explaining why some vehicles simply cannot be repaired economically anymore and adjust their T&Cs accordingly.

Here’s some extracts from the Direct Line report;

Penny James, Chief Executive Officer, commented:

“Today’s trading update follows a period of heightened volatility across the UK motor insurance market, in which we have seen claims inflation in motor in the first half of 2022 spike above the levels assumed in our pricing. As a result, we are revising our combined operating ratio target range for 2022 to 96-98%. We have already taken actions including increasing prices and deploying new pricing capability to restore margins, which mean we expect our 2023 combined operating ratio will improve to around 95% and we reiterate our medium-term target range of 93-95%.

This, combined with our diversified business model, our strong balance sheet and our continuing actions to further improve resilience, gives us confidence in the sustainability of our regular dividends for this year and as we look ahead.”

Current trading

The motor insurance market experienced significant levels of severity inflation in H1, primarily resulting from higher used car prices, and amplified by higher third party claims costs, longer repair times and inflation in the cost of car parts. Market premium inflation has continued to lag the increases in claims inflation.

Whilst the Group has been pricing claims inflation over the last 12 months, experience has been in excess of the levels assumed. The Group now estimates overall motor claims severity inflation for 2022 of around 10%.

As a result, the H1 2022 current year motor loss ratio is now expected to be in the region of 86%. Due to conservative reserving during 2021, the Group’s prior year reserve releases in the first half remain in line with expectations.

Costs

The Group continues to target a 20% expense ratio, but given the reduction in motor market average premiums since the target was set, predominantly driven by structurally lower claims frequency, it is now unlikely this will be achieved in 2023.

Dividend and capital management

The Group believes its balance sheet and outlook for capital generation in the medium term remains strong due to pricing and operational improvements arising from the Group’s transformation programme.

In the first half of 2022, the solvency capital ratio has reduced by an estimated 7 percentage points due to the mark to market effect of widening credit spreads on the Group’s investment portfolio, albeit this is expected to pull to par over time. Based on this and other movements in the first half of the year, the Group estimates a solvency capital ratio at 30 June of around 150% assuming an unchanged interim dividend of 7.6 pence per share.

In the light of the current market environment, the Board has decided not to launch the second £50 million tranche of the £100 million share buyback programme announced earlier in the year.