UK motor ‘firmly in a soft market’ as margins fall, says Jefferies

By Ryan Hewlett

Feb 21 - (The Insurer) - UK motor insurance premiums fell in January as the market failed to sustain the positive rate momentum achieved in late 2024, according to Jefferies, which described the industry as being “firmly in a soft market”.

In a circular, Jefferies said its UK motor insurance tracker indicates that premiums were 0.9% lower in January versus the prior month, and 12.5% lower year on year.

Jefferies estimated that the 32.8% change in average motor insurance premiums since the beginning of 2019 is less than the change in the cost of claims, which stood at 48.9%.

The investment bank first flagged in September that estimated written margins in UK motor insurance had re-entered a deficit position compared to pre-pandemic levels.

“While premiums have been falling for much of 2024, the cumulative deficit between premiums and claims only emerged in September, extending materially since then, and now stands at -16.2%,” said Jefferies in its most recent note.

“In our view, it was possible to look through short-lived price declines in early 2024, as this may have been a correction to reflect prices overshooting claims inflation as the latter slowed down. However, today it appears to us that the industry is firmly in a soft market.”

Using the latest data, the investment bank now estimates that the UK motor insurance industry will in aggregate report a combined ratio of 99% for 2024.

As lower prices earn through, Jefferies expects margins to deteriorate further to 109% over 2025, still a little way off the 113% recorded at the bottom of the previous cycle.

“One caveat to these industry forecasts is that it is based on a combination of known prices and the industry's view of claims inflation,” it said.

Jefferies noted that a positive takeaway is that claims inflation appears to have “slowed meaningfully” in early 2025. The investment bank’s claims tracker now suggests that claims have risen just 0.7% month-on-month, while the year-on-year figure has risen by 0.8%.

The cost of spare parts rose 0.9% month on month and 1.6% year on year, while maintenance and repair costs increased 1.5% month on month and 5.5% year on year.

In addition, car hire costs, which represent 20% of total inflation weighting, fell 0.9% month on month and are down 6.5% year on year.

“To this, we could also include the cost of second-hand cars, as this is a close proxy of the value that insurers might ascribe to total losses. Presuming that total losses are 30% of the total, and the categories above are pro-rated to 70%, then overall claims costs appear to be down -0.5% month-on-month (-0.5% year-on-year),” it said.

“With this in mind, it's thus surprising to us that insurers still report mid-to-high-single-digit growth, which we hope (but would want to see confirmed) suggests management prudence.”