For better or worse: where next for motor claims inflation?

UK personal motor claims cost inflation could be high again in 2012, after surging to 12.5% between 2010 and 2011.

And although the lower number of claims has been helping temper the rise in claims costs, there is no guarantee this trend will continue.

The should be particularly concerning because rates rises in UK motor have started to tail off and even fall in some cases.

Before 2011, the insurance industry had enjoyed two years of relatively low claims inflation for incurred motor third party damage (TPD) claims. TPD comprises car damage and bodily injury.

According to data from the Institute and Faculty of Actuaries, TPD incurred claims inflation between 2009 and 2010 was 4.6% and 4.7% between 2008 and 2009 for comprehensive private motor. This lull followed increases of 10.1% and 10.3% in the previous two years.

However, this dip came to an abrupt end with the 12.5% inflation seen between 2010 and 2011, and it is unlikely that 2012 will see a return to the lows seen between 2008 and 2010. While pointing out that data for 2011-2012 will not be available until early next year, Institute and Faculty of Actuaries spokesman David Brown said: “For the previous two years (2009 and 2010) we saw inflation of around 5%. For the two years before that it was around 10%, hence the fear that we have returned to high average cost inflation and that 2012 risks seeing a figure of about 10%.”

Brown added that claims frequencies are falling, in part due to increased fuel costs, which is helping to offset the rise in claims costs.

According to the Institute’s data, TPD reported claims frequency fell by 11.2% between 2010 and 2011, after falling 5.5% in the previous period.

However, Brown hinted that the industry may not be able to rely on falling claims frequency continuing to offset rising claims costs. He said: “This drop in frequency largely offsets the increase in average costs – at least for the moment.”

One of the industry’s biggest concerns is bodily injury claims inflation. In 2009 and 2010, this trend forced many motor insurers to strengthen reserves, improve claims handling and hike prices. However, while rates are now falling, it is clear that bodily injury claims inflation is showing no signs of abating.

Large bodily injury claims inflation is running at 10%, while inflation for the smallest claims is running at 15%.

Brown said: “We believe that injury claims overall account for 50% or more of the cost of comprehensive motor insurance, which will lead to inflation of between 5 and 10% overall.”

While this would indicate that motor insurers should think again about letting rate increases slide, Brown added: “How insurers choose to price will be driven by many other factors.”