Briefing: Why getting back to basics is the only route forward for motor insurance

The motor insurance market is still reeling from one of its most volatile periods in recent memory, with the Covid-19 pandemic playing havoc with driving habits, claims inflation going through the roof and new regulatory requirements not only changing how insurers monitor customer outcomes, but even how they price policies.

The FCA recently said that claims inflation has been the driving force behind recent hikes in the cost of motor insurance. Subsequently, margins in the motor market remain wafer thin for many – early analysis of insurer Solvency and Financial Condition Reports (SFCRs) for 2024 by Insurance DataLab reveals an aggregate combined operating ratio of 106% for UK motor insurers, for example.

This means that the motor market has now failed to make an underwriting profit in each of the last four years. This suggests that something is clearly not right and that now might be time for motor insurance to rediscover its purpose – pricing risk fairly and paying claims efficiently. Everything else is a distraction.

Before the FCA’s general insurance pricing practices (gipp) reform in 2022, the motor market spent too long underpricing risk in order to win new business. The fallout following gipp’s introduction was always going to be painful – and it has left a serious dent in consumer trust.

For many consumers, motor insurance no longer feels like a service – it feels like a penalty. A grudge purchase wrapped in complexity, where prices fluctuate without explanation and claims processes are often slow, opaque, or just plain frustrating – take your pick.

The response from many insurers has been to push harder around add-ons and upsell opportunities. Legal protection, breakdown, key cover, excess protection – all repackaged and resold to help rebuild margins. And that’s not to mention the plethora of different tiered products now available in the market.

But that strategy only works if the core product is doing its job. And right now, too many customers don’t believe it is.

To rebuild trust – and deliver sustainable results – the motor insurance industry may need to simplify and focus on the two things that matter most – can you price accurately and can you settle fairly?

Claims question mark

For all the market-wide talk of innovation and digital transformation, too many motor insurers are still running on clunky systems that are slow to process claims, provide inadequate updates and communications and generally lead to frustration and irritation.

Others, meanwhile, are leaning heavily on outsourced claims operations without always maintaining visibility or control over the customer experience – something that the FCA has already raised as a concern in the home and travel markets.

And this is not just a customer service issue – it is a performance one.

Poor claims processes drive up costs, increase complaints and erode customer retention. And in a market where pricing is so competitive, there is less room to mask operational inefficiencies with higher premiums.

The firms that will come out of this market cycle strongest are the ones treating claims as a differentiator – not a cost centre – as well as those investing in pricing not just as a technical function, but as a strategic lever for long-term profitability.

Basic functionality

This is not a call to abandon innovation. But the priority right now is not to introduce more tech for tech’s sake – it is fixing the basics. Making sure the fundamentals of motor insurance are working as they should be.

Customers are not asking for more features. They are asking for fairness. And if insurers can deliver that – clearly, consistently and competitively – everything else becomes that little bit easier.

Motor insurance does not need to be exciting. It just needs to work. And that, right now, would be an achievement worth talking about.