From satnavs to parking sensors, technology has become an integral part of UK driving.
But insurers are warning that there is a downside to this gadgetry. And that downside is slowly eating away at their profit margins and share prices.
Over the past few weeks some of the UK’s biggest motor insurers — including Direct Line and Hastings — have said that the cost of settling claims is rising as cars become ever more high-tech and complicated to fix.
“Accident volumes are pretty stable but the cost per accident — particularly repair costs — are driving inflation,” said Toby van der Meer, chief executive of Hastings. “More expensive vehicles are safer than other cars, but more expensive to repair. It is not just repairing a piece of bent metal, it is fixing technology and sensors.”
It is not just the parts — insurers say that labour prices have also gone up as cars become more complicated to fix.
Stephen Hester, chief executive of insurer RSA, said it was a global trend: “It’s the same in pretty much every motor market.”
Another tech-related problem pushing up claims is the growing number of thefts. The Association of British Insurers says that car thieves are “having a field day”, hacking into the data sent when key fobs are used to open car doors and using this information to steal vehicles.
According to the ABI, the industry paid out £376m for car theft last year, 27 per cent more than in 2017.
Add these factors together, and costs are rising. Direct Line said earlier this week that claims inflation was running at the “upper end” of its long-term expectation of 3 to 5 per cent.
Normally, insurers would try to cancel out the higher claims costs by raising their prices for customers. But they have been struggling to do that this year. The average premium, according to the ABI, is 6 per cent lower now than it was at the end of 2017, having fallen in four out of the past five quarters.
“It is a very competitive market,” said Tony Sault, UK general insurance market lead at consultancy EY. “People are deploying strategies to build their books, undercutting [rivals] to build volume up.”
Those insurers aiming to increase customer numbers will have been helped by a good year in 2017. According to EY, the industry’s underwriting profit that year was the highest since 1994, because insurers were able to raise prices. That gave some the financial flexibility to expand in 2018 and 2019.
UBS analyst Jonny Urwin said that mid-market insurers such as Esure, the AA and LV were keenest to grow and were pushing prices down. He expected claims inflation to run ahead of price inflation until the fourth quarter of this year.
That will create a problem for some of the bigger listed insurers, which want to resist pressure to reduce prices for customers and protect their margins. But doing so means they risk losing business.
“Volumes at listed companies have been weak for some time,” said Mr Urwin. “Whilst listed players are acting rationally, there is still competition from the mid market.”
These pressures are affecting share prices across the sector.
Over the past month, shares in Direct Line, Admiral and Sabre have all fallen by high single-digit percentages. Meanwhile, Hastings is down 18 per cent since a trading update in late April and Saga’s shares have almost halved since it warned at the start of April that profits would fall because it planned to cut prices.
The situation is also unlikely to ease in the near future, with rule changes on the horizon that are creating more uncertainty for the industry about both prices and claims.
The Financial Conduct Authority has launched an inquiry into pricing practices in the industry — regulators are worried about existing customers being charged far more than new ones, and although analysts expect the main impact to be on the home insurance market, there could be a spillover into motor cover.
There is also uncertainty about claims costs, particularly for personal injury claims. The Civil Liability Act, which was passed last year, is designed to cut the amount of whiplash claims being made in the UK. But UBS does not expect the law to be fully implemented until October 2020, and even then it is not clear how successful it will be in cutting costs.
Mr van der Meer said that all of these pressures should even out in time. “In the long term, we’d expect premiums to match or exceed claims inflation.”
In the meantime, he added, it was a question of self help. “You control the levers you can control. We make sure we do repairs at the most economic cost, and the rest is about pricing effectively, increasing retention and remaining low cost.”