Need to know: Why are my car and home insurance costs rising?

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Insurance companies have pushed up the costs of protecting homes, cars and valued possessions from loss and damage.

Motor insurance prices hit a record high this year after premiums skyrocketed by 61 per cent in the 12 months to August. They are not expected to flatten off until 2025.

Meanwhile, according to accounting firm EY, prices for home insurance — including both buildings and contents cover — are expected to rise by 36 per cent over the next two years, and this year they will leap 17 per cent.

FT Money explores what’s driving up costs and what you can do to mitigate them.

Why have premiums gone up so fast and by so much?
As in many other industries, inflation, supply chain and labour market stresses are weighing heavily on the insurance market.

According to LV=, the costs of vehicle repairs have shot up by 46 per cent due to increased energy and labour costs, while courtesy cars, for when customers need a replacement vehicle, are 52 per cent more expensive. 

Cars with increasingly high-tech features such as sensors, cameras and high voltage systems are also harder to replace and require more specialist labour. Paintwork, which most claims require, is also eating into margins, with the cost of paint having risen 20 per cent.

“Premiums fell during the Covid pandemic due to reduced claims volumes, but are now back to normal levels and we’re seeing a catch up of three years of underlying inflation,” said Martin Milliner, claims director at LV= General Insurance.

Supply chain difficulties have also driven up construction costs for fire and flood-damaged homes, and global increases in the frequency and severity of weather events are also driving up premiums.

Last year, storms Dudley, Eunice and Franklin led to 170,000 property damage claims and £473mn payouts in the UK. Consumers who live in particularly badly affected areas will see the biggest rises.

“Storms can hit anywhere, but if you’re on a flood plain your insurance will go up quite dramatically,” said Paul De’Ath​​​​, head of market intelligence at Oxbow Partners.

When can we expect to see them come down again?
“It’s important to remember in insurance that there is always a market cycle,” said Huw Evans, a partner in KPMG’s insurance practice.

“There are some signs the market is plateauing but I don’t think we will see a return to a softer market until potentially 2025 onwards.”

Pressure on premium prices may come down if supply chain issues subside, so that the availability of second-hand cars increases, or if geopolitical flashpoints such as the war in Ukraine cool off and ease energy prices.

Furthermore, central banks’ ability to tame inflation will be decisive.

Has the loyalty penalty ban worked?
The “loyalty penalty” ban stops insurance companies from quoting higher prices to renewing customers than new ones presenting the same risk.

In 2018, the Financial Conduct Authority found that 6mn policyholders would have saved £1.2bn if they had been charged the average price for their risk. This often meant that customers had to shop around for new policies every year.

The ban was introduced in January 2022, but due to the other difficulties affecting the industry, it is hard to tell whether consumers would have benefited from savings in their absence.

However the combination of the ban and high inflation has squeezed insurer margins, meaning that increases to both new and renewal rates are likely going forward, which will “drive a marked increase in average premium”, according to Oxbow analysis.

What can consumers do?
Although consumers using a comparison website might find they currently can’t get a cheaper deal, experts say that they should try several and consider other measures. 

The way your insurer gauges your risk profile could drive up your costs, and another company might assess you differently.

Consumers can also choose a higher excess, which increases the amount you’ll have to pay if you claim. For instance, if you claim for £1,000 and your excess is £200 you’ll receive £800 from your insurance company. 

The higher your excess, the lower your premiums, but you should be able to afford the excess. If you can’t, you may not be able to claim at all. Some experts recommend ring fencing the amount you might need for an excess.

Although you are required to have insurance if you use your car on roads and public places, you can opt out of add-ons such as key and legal cover if you feel you won’t need it.

You can also explore pay-as-you-go insurance or join a car club if you don’t drive regularly.


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