According to analysts at Jefferies, the cost of automobile insurance in the UK continues to rise. Premiums were +35% higher YoY in February and +3.4% higher than they were in January, according to their UK auto insurance tracker.
“ Despite the fact that this is positive, it is important to remember that the market is still catching up.
“Our tracker indicates that premiums have not significantly changed to cover rapidly increasing claims expenses in 2021/22, even though market premiums decreased 17% in 2020–21.
According to Jefferies Tracker, there is still a pricing gap when compared to margins before the pandemic. From the beginning of the year, claims have increased cumulatively by 27% more than premiums have, indicating a price shortfall compared to pre-pandemic margins.
The analysts stress that in order to close this gap, insurers would need to raise premiums by an additional +6% over and beyond claims severity inflation, which they estimate would restore margins to levels seen before the pandemic (on a written basis).
In addition, Jefferies notes that while it must wait for the market to stabilize before it becomes more favorable toward UK motor insurers, it does recognize that the industry is currently on the defensive due to the health of the economy.
“We have examined the risks on insurers,” the analysts write, “with the market focused on the wider dangers of a run on the assets in financials. Although auto insurance contracts can be canceled, we think auto insurers are reasonably well protected from any liquidity risk.
“Liquidity risk is reduced when vehicle insurance policies are paid for in installments since after the last payment, future premiums are no longer owed and the insurance coverage ends. When insurance plans are paid in full up front (and have a cash value as a result), cancellation is not free for the policyholder.
“Any cash return will be net of cancellation fees, the insurance coverage will end, and given that motor insurance in the UK is required, the customer will no longer be able to drive their vehicle,” they add.
Hence, in our opinion, there is little likelihood of a run on the assets of a motor insurer. Also, the listed UK auto insurers that we work with seem to have limited exposure to Credit Suisse and AT1s in general.
According to Jefferies, the second part of 2021 and the beginning of 2022 saw a sharp increase in the cost of used cars, which was a big factor in 2022 claims inflation. The severity of complete loss payouts for vehicle insurance companies is affected by this, according to the analysts.
The high rate of inflation for used automobiles was mostly brought on by supply-chain problems as a result of a semiconductor shortage, which analysts claim has not yet subsided.
According to S&P Global Mobility data, the production of light vehicles decreased by an expected 266,401 units in Q1 2023, further disrupting the auto industry.
