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Supply chain crisis makes higher car insurance premiums inevitable

Posted on Sat, 16/07/2022

It was never going to last.

Sabre, one of the most experienced (and successful) car insurers in the industry updated the market on 14 July with its half-year results and it made for pretty grim reading.

The combined operating ratio (COR) moved from 74.4% to 98.9% over the last six months, meaning the thinnest of underwriting returns. Sabre has been forced to increase its reserves to manage the impact of soaring inflation across the motor claims supply chain.

Sabre said that claims inflation had risen to 12% from 8% a year ago. It’s impacting the whole of the supply chain. Sure enough, premium prices have increased as a result, by 19% in the year to date.

The FT reported that Sabre’s share price dropped by 40% after the announcement, with shares among other insurers also recording double-digit losses.

After the positive returns for motor during the lockdown, EY believes that overall performance will dip into the red this year. EY’s prediction that prices will rise by just 2% this year already looks optimistic, given Sabre’s pricing action, with its 18% expected premium increase for next year looking equally unlikely.

It leads to questions as to how insurers will manage to meet the government’s policy outcome of handing back £35 to customers as a result of the whiplash reforms, especially as the pandemic-induced price reductions of 2020-21 cannot count towards these.

It underlines how both future-looking policy decisions have a habit of being overtaken by events and illustrates how a £35 reduction is always going to be masked by the multitude of other factors which make-up the complex world of insurance pricing.

Veterans of the motor claims industry say they’ve never seen anything like this in 20 years or more. What started as a shortage of semi-conductor chips – following factory shutdowns during Covid – has morphed into a perfect storm.

Sabre’s CEO cited inflation “hitting all key areas including parts, labour and wages, credit hire, paint, car values and availability, and provision of care.” It seems unlikely that these inflationary pressures will ease any time soon.

It is very difficult, in the hyper-competitive car insurance market, for individual insurers to increase premiums. Therefore pricing action to manage the industry through the claims supply chain crisis will need to be cross sector.

There may be some answers. Motor claims is historically frictional, which creates distrust between insurers and suppliers, be they repairers, mobility or legal services providers. Removing friction removes cost; there is no need to incur the expense of taking a claim to court when alternative dispute resolution (ADR) or sticking to agreed protocols can cut claims costs and remove hassle. A shorter settlement time also makes for a better customer outcome.

The pandemic proved that compensators and claimant representatives resolving challenges together was the best strategy to manage the industry and its customers through the pandemic.

With a new crisis upon us and bringing big increases in premiums, working together may well be the best or even the only option that keeps a lid on the cost of claims.