Motor insurance: price rises to decelerate from current heights as claims inflation eases

The sharp gains in motor prices in advanced markets over the last two years came as insurers sought to repair underwriting profits. US personal motor insurers lost a cumulated USD 53 billion in 2022-23. We anticipate that the rate increases will decelerate soon, driven mainly by disinflation, improved underwriting performance, and increased competition. We highlight too that the rate increases reported in the US appear overstated, which could have also led to an overstatement of headline and core CPI.

Key takeaways

• We expect price increases in personal motor to flatten soon.
• In the US, an overstatement of motor inflation meant the March core CPI print was likewise likely overdone.
• The rise to current highs has come as insurers re-priced premium rates to repair underwriting results. In the US, personal motor insurers lost USD 53 billion 2022-2023.
• We expect improved profitability, falling prices for used cars and repairs, economic disinflation generally, and increasing competition to drive the slowdown in premium rate gains.
• In the US, the CPI vs PPI comparison, and in the UK data on renewed vs new policies written signal that competition is on the rise. 

In our view, increases in personal motor premium rates are near their peak, and we expect to see a flattening of month-on-month changes over the coming months. Longer term, we expect the main drivers of the deceleration in rate increases over the next two years will be disinflation effects, an ongoing strengthening of underwriting results, and increased competition. The deceleration should lower the cost of car insurance for consumers. 

Outsized price increases in personal motor in Germany, the UK and the US have had a notable effect in terms of pushing headline consumer price inflation (CPI) higher. According to latest official data, in Germany motor insurance CPI was up 23.4% y-o-y in March 2024, and in the US it was up 22.2%. The US CPI figure may be an over-estimate: the producer price index (PPI) puts personal auto insurance inflation at 6.5%, while Swiss Re estimates based on industry rate filings data indicate a 14% y-o-y increase in March. In the UK, data on all business underwritten show a 33.5% rise in premiums paid in 4Q23, and a 25% gain in 2023 overall compared to 2022.¹

Historically, motor insurance price growth in advanced markets has been muted. The rise to current highs was driven by a surge in losses after the high underwriting margins of 2020 (see Figure 1), higher repair and replacement costs on account of global supply chain disruptions and costs of labour, and a rise in the number of accidents as traffic density rebounded post lockdowns. The latter led to both higher claims frequency and severity (more severe accidents). In the US, supply-side shortages in 2021-22 drove a 41.2% increase in the cost of used vehicles, while new vehicle inflation rose 13.2%. At the time, premium rates reflected soft market conditions, and profitability in many markets deteriorated markedly. ³ US insurers saw an underwriting loss of USD 53 billion in personal auto in 2022-23. ⁴ Claims and profitability data indicate that insurers were under strong pressure to re-price, even if improving investment returns as interest rates rose could offset underwriting losses.

Figure 1: Underwriting results for motor in selected markets, % of net premiums earned

The step-up in pricing over the last two years should feed stronger underwriting results in 2024 and 2025. We anticipate that profitability will also benefit from lower inflation in motor-related categories. Our forecasts for used car maintenance and repair inflation indicate slowing claims cost growth vs 2023 (see Table 1).[4] We expect disinflation in the used car market to continue this year and next. Still, repair costs will likely slow only gradually and remain above pre-pandemic levels with still-elevated wage growth in the US and Europe. The disinflation will likely be more gradual in Europe owing to the slower pass-through of inflation to wages.

Table 1: SRI motor-related inflation forecasts, %

With claims inflation easing, more adequate pricing and rising investment returns, competition in motor insurance is intensifying. This contributes to our expectations that underwriting profits in the US and UK may remain challenging in 2024-25. It also supports our expectation of decelerating premium rates. In the US, there are signs that consumers are shopping around more, in pursuit of discounts from insurers. This in part explains the gap between motor vehicle insurance inflation in the CPI (22.2% y-o-y in March), which does not reflect switching behaviour, and the PPI (6.5%) that does. If US motor CPI cools in 2H24 as we expect, its outsized 0.8 ppt contribution to core inflation of 3.8% in March 2024 should ease by the year end. However, average rate changes will likely remain overstated. Compared to rate filings. we estimate that March core CPI was over-stated by 28bp. In Germany, motor insurance contributed 0.3 ppt to core inflation. The motor repricing cycle lags the US, but the contribution to core CPI in Germany should also fall in 2H24.

In the UK, key insurers have indicated they will not raise rates further.⁵ Data on new vs renewed business indicates that competition is increasing. In 4Q23 the number of renewed personal motor policies was down 9% y-o-y, and the newly-underwritten were up 11%, with the gap between the series having opened in early 2023. Both saw price rises, but average premiums for renewed business were up 36% vs 28% for new policies.