Some thoughts from James Anderson, Principal Consultant at Curinos;
Post-covid insurance price volatility and inflation may finally be tapering in the UK, but for car and homeowner insurance we’re no closer to knowing what “normal” buying behaviour will be over the next renewal cycle. What we do know is that competitive advantage is no longer gained by aggressive new business discounting followed by price walking. Rather, it’s through the careful balancing of underwriting appetite, portfolio, brand and value proposition for each appropriate segment.
While inflation spikes are always troublesome for insurers, sudden sharp movements upward can be particularly difficult. That’s because with policies renewing annually, price increases lag claim costs, which leads to increased risk exposure. So even though inflation began to moderate in mid-2022, premium prices continued to rise through 2024 as the industry looked to recoup some of the depleted capital from losses absorbed in previous years. Combined ratios, the key industry profitability metric, rose above 100%.
The Rising Cost of Claims
UK insurers paid out an absolute record figure of £3.2 billion in car claims in the first quarter of this year – the highest quarterly figure since the Association of British Insurers (ABI) began collecting these data in 2013. Of this, £2.1 billion was for repair costs, reflecting persistent cost pressure across labour, parts and repair times. The design of modern vehicles – with more sensors, ever greater complexity and tighter tolerances -continues to exacerbate the issue.
This has also caused the underlying risk mix on the motor side. Modern cars are fundamentally heavier, safer and more complex than those of previous generations. While this reduces the severity and frequency of bodily injury claims, it increases risks on the repair side. In addition, the change to the personal injury discount, or Ogden rate, has reduced the cost and reserving requirements on liability risks, with subsequent reserve releases bolstering the results of most major players in the first quarter.
The risk mix for home insurance is also deteriorating. ABI data show claims costs of £15bn in the first quarter, an increase of £170m from the same quarter last year, as insurers respond to pressures on labour and material costs on the buildings side. Meanwhile, severe weather events are contributing to greater loss volatility. Cold snaps can burst pipes, rainstorms can lead to flooding, and heatwaves can push foundations past assumed tolerances and cause subsidence. At the same time, cost-of-living pressures have reduced demand for contents coverage, both actual cover and limits purchased, thereby keeping a lid on pricing.
So while pricing may be moderating, there remains uncertainty, and month by month prices and new business volumes are not descending along their typical smooth soft market curve.
Competition is Intensifying
Insurers have also faced pressure on their direct operational costs, from staffing to price comparison websites (PCWs), whose dominant distribution positions – currently 90% of new business motor sales – push up an insurer’s acquisition fees. This dynamic along with continued shifts in pricing on a group-by-group and brand-by-brand basis continues to drive large changes in share and the heightened potential for adverse selection. With General Insurance Pricing Practices (GIPP) now firmly established, the challenge of harmonizing front- and back-book pricing continues, with insurers seeking to pick up pockets of either underserved or overpriced business that fit within their overall portfolio.
To compete more effectively for new business, a common technique post-GIPP was to reactivate dormant secondary brands with small legacy back books. But it resulted in lower click-through rates (CTR) and generally lower retention, so insurers are again leading with their primary brands. Even so, the lifetime value of business remains considerably uncertain, along with how it may vary by segment, as the industry adjusts to a post-inflation, post-GIPP pricing environment. That’s because shopping behaviour continues to shift in terms of both frequency and consideration around value.
What It Means for Policyholders
While the overall market is now softening, older customers have seen prices rise over the first half of the year whereas costs are falling among the youngest, which has driven shifts in shopping at both ends of the demographic spectrum.
Traditionally, older customers have been more attractive to insurers because they display lower claims costs and risk volatility, higher retention and a greater propensity to add coverage. The pre-GIPP regime also meant that a number of older customers were sitting on large legacy price increases, while post-Covid digital migration also show that the sector has been shopping.
Because the home insurance market naturally skews older and because of continued price pressure on buildings exposure, these customers are likely to make their first car insurance switch before shopping for a new home policy. And because PCW shopping is considerably lower on the home side, an opportunity exists for cross-sell between products even though it requires careful marshalling of data and an effective cross-sell strategy.
At the same time, as tenures naturally lengthen in today’s post-GIPP, softer-pricing environment, a growing slice of new business will consist of customers who are price-driven, highly mobile and less engaged with brand. Because socioeconomic and attitudinal factors drive switching behaviour, this is likely to cut across traditional life-stage-based segmentation.
Outlook: Continued Uncertainty
Despite forecasts suggesting a return to normal growth and inflation levels in 2025, inflation in the UK bounced back to 3.5% in June. This was driven primarily by household bills and services rather than material costs, and it will likely put increased pressure on wages and labor costs. Fuel prices, however, eased slightly, which could lead to increased mileage and therefore higher demand for auto insurance. And, depending on their severity, US tariffs could have a disinflationary effect on claims costs as reduced US demand leads to a glut of replacement parts. Recent data has suggested a softening in price.
Insurers face a market where customer behaviour is evolving rapidly but not yet predictably. While pricing remains the lever to drive volume, open questions remain around the relative value of brand, segmentation, proposition design, customer lifetime value and the ever-present need to align with underwriting appetite.
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