Inflation adds to pressures on commercial motor insurance rates

In the UK commercial motor market, economic inflation is likely to exacerbate existing and emerging issues associated with claims inflation that have been causing upward pressure on insurance rates for some time.

The reasons behind claims inflation have been well documented – more advanced technologies in vehicles leading to more expensive repairs in the event of an accident, supply chain issues in repair networks linked to both the pandemic and the Ukraine conflict, labour shortages – especially in the electric vehicle segment - and rising personal injury claims costs, for example. The purpose of this article is not to delve into those – other documents, such as AXA’s ‘Guide to Motor Claims Inflation’¹ can provide more detail on some of these factors.

Inevitably though, rising economic inflation – mainly affecting repair networks - is adding to those cost pressures and is likely to feed through into insurance pricing.

We see these pressures arising in areas such as the cost of parts – not only some of the higher technology components now more widely used in vehicles, but in basics such as paint.

Energy costs² are clearly also a factor, affecting all links in the supply chain from manufacturers to body shops, to insurers themselves. Furthermore, the combination of labour shortages and wage inflation means that labour rates are typically rising.

Then, there are worsening exchange rates to take into account: in 2020 the UK motor trade imported just over £9 billion in parts, according to the Society of Motor Manufacturers and Traders 2021 Automotive Trade Report³.

And another cost of living-related factor that could impact prices is the knock-on effect from a higher propensity for fraudulent claims. Recent history suggests that recession leads to a 25% increase⁴ in fraudulent claims in both commercial and personal lines. While the potential for spurious whiplash claims has been partially shut down by the Ministry of Justice reforms that took effect in mid-2021, there are worrying signs of a rise in tinnitus claims⁵ that could end up translating into higher premiums for all.

Potential impacts

So how might owners of commercial vehicles and fleets expect these factors to affect insurance prices? Clearly, individual cases will depend on location, usage, claims history and so on, but we can give you a feel based on our dealings and conversations across the market.

Claims inflation is widely stated to be around 10% for both third party and own damage losses so insurers are suggesting rating will need to increase into 2023. As ever, views vary, some insurer's may suggest increases for inflation alone need to be 10-15% (so ignoring the claims performance), others may be in the 5-10% range.

If we put that in the context of what has happened so far this year, we have seen commercial vehicle insurers targeting rate increases of 5-10% increase across their portfolio, compared with what we’ve observed as a consistent average annual increase in the London market of 3-4% over prior quarters.

Something else on insurers’ radar, in which inflation may play a part, is that the Ogden Rate (the discount rate applied to long-term injury awards paid using PPOs - periodical payment orders) is due for review by 2024. This process will start next year and the feeling from some is that the current -0.25% discount rate could reduce to anything as low as -1.5%. This would increase the settlement cost of a long-term injury award significantly.

How can commercial vehicle owners respond?

• Clarity and quality of information, specifically around proactive risk management and future plans (such as transition to electric vehicles) can significantly improve your and your broker’s negotiating position.
• Effective management of driver behaviours – driver training, in-vehicle coaching and better data capture, including the use of telematics, should help companies manage fleets more safely and efficiently and control insurance costs.
• Work with your brokers to enhance Claims First Notification of Loss procedures (since speed can help avoid the cost of claims spiralling) and claims defensibility (analysis that helps identify and reduce the number and severity of future claims).

To find out more, please get in touch.

Footnotes

¹ AXA’s ‘Guide to Motor Claims Inflation’
² Energy costs
³ Society of Motor Manufacturers and Traders 2021 Automotive Trade Report
⁴ Recession leads to a 25% increase
⁵ Rise in tinnitus claims