A nation of rusty drivers is back on the road, bringing fresh problems for UK motor insurers after a sharp fall in claims during lockdown.
Companies such as Direct Line, Hastings and Admiral have benefited from a big drop in claims because there were many fewer traffic accidents while drivers stayed off the road.
Traffic fell by about three-quarters between mid-March and mid-April, according to government data, while Direct Line reported last month that the number of claims plunged 70 per cent in April.
Some insurers have passed the savings on. Admiral offered a £25 per vehicle rebate to all customers — at a total cost of £110m — while LV made £30m available to help people in financial difficulty because of the crisis.
Investors have also felt the benefit: shares in car insurers have held up relatively well. Hastings’ price is up 2 per cent in the year to date, while Admiral is flat. The FTSE 100, by contrast, is down 16 per cent.
The calm period is coming to an end, however, and analysts said the second half of the year would present insurers with big challenges as they attempted to predict claims and adjust prices accordingly.
“There are a huge number of moving parts for the rest of the year,” said Jon Hocking, insurance analyst at Morgan Stanley. “We are assuming that motor claims will halve for March, April, May and June, but the insurers . . . will want to be cautious.”
One of the biggest challenges is the uncertainty about traffic levels.
Toby van der Meer, chief executive of Hastings, said medium and long-term driving habits were the major question for the industry.
“You’ve got a couple of conflicting dynamics,” he said. “In a more recessionary . . . environment and with more people working from home [there might be] less driving in the long term. On the other hand you’ve got low oil prices, low fuel costs and an aversion to public transport . . . that might point to more driving.”
Deloitte expects claims to drop 29 per cent over the year as a whole, less than originally expected.
Damaged cars are also likely to become more expensive to repair.
“There was a dramatic drop-off in driving” during lockdown, said Paul De’Ath, head of market intelligence at consultancy Oxbow Partners. “But the severity of claims went up because people were speeding more and a large number of repair centres have been closed.”
Many repair shops are still closed, and those that are open could find it tough to source parts because of the disruption caused by the pandemic. So repairs are likely to take longer and cost more. That will have a knock-on effect on the amount insurers pay to give their customers courtesy cars.
“There’s a concern that claims inflation will kick in once traffic gets back on to the road,” said Tony Sault, UK general insurance market lead at consultancy EY.
Insurers will have to factor both the lower claims of the past few months and the uncertainty about costs for the rest of the year into their models and pricing.
“Motor insurers are not set up for this,” said Mr De’Ath. “They don’t have risk models for a month with 70 per cent less claims [than usual]. It probably makes it harder for them to price, and there is a danger that they could price risk incorrectly.”
Insurance prices had been rising before the crisis. According to confused.com and Willis Towers Watson, they went up 6 per cent in the 12 months to the end of March. But given the big fall in accidents and claims in the first half of the year, it is likely to be harder for insurers to keep pushing their prices up.
“Overall pricing will remain flat or depressed for the rest of the year,” predicted Mr Sault.
Morgan Stanley’s profit forecasts for Admiral and Direct Line this year are not much changed from before the crisis, despite the drop in claims over the past few months. For next year, the bank is expecting lower prices to put pressure on earnings.
There is also a longer-term danger for established insurers. With the UK in lockdown, cars spent weeks immobile on drives and roadsides. James Blackham, chief executive of pay-as-you-drive insurance specialist By Miles, believes the experience will put people off annual policies.
“We’ve seen more drivers waking up to the idea that insurance doesn’t take into account the number of miles driven,” said Mr Blackham. “May was our best-ever month in terms of sign-ups. We were about 25 per cent up on pre-crisis numbers. We’ve seen more customers coming to the website and understanding our message.”