Warnings of a long recession also sent the pound into a downward spiral, further piling pressure on insurer’s finances

The Bank of England (BoE) raised interest rates by 0.75% to 3% today (3 November 2022), signalling the biggest single jump in rates since 1989.

As it announced the rate hike, the BoE also warned that the UK was already in economic recession and would face a “very challenging” two year financial slump with unemployment projected to nearly double.

Jamie Jemmeson, head of structured products at currency specialist Lumon, said: “With the cost of living crisis and rising inflation, insurers may be forced to scale back their services as new business decreases and premium prices push upwards.

“[Insurers] face an environment where sustainable growth and revenue returns are difficult.”

Jemmeson added that inflation currently sat at a 40 year high of 10.1% and was projected to increase further to a peak of 11%

He added: “These macroeconomic factors affect the exchange rate and dictate the UK’s borrowing costs and interest rates.

“With the UK’s credit rating outlook recently downgraded, the country’s debt to gross domestic product ratio will negatively affect the sterling, further squeezing profit margins for insurance chief financial officers.”

Last month (20 October 2022), for example, Confused.com’s Car Insurance Price Index revealed that average comprehensive car insurance premiums saw the biggest annual increase for five years across Q3 2022 as insurers looked to mitigate against increased costs.

Long recession

As the BoE warned that the recession could last for two years, the value of the pound dropped by 1.9% on currency markets to $1.116 – its lowest level in two weeks – before recovering slightly.

Susannah Streeter, senior investment and markets analyst at financial services firm Hargreaves Landsown, commented: “With borrowing costs ramping up again, consumers will be looking long and hard about where they can cut costs to keep paying for their mortgage or rent as other cost of living pressures also mount.”

Increased economic pressures are already causing some consumers to consider cutting back on cover – this could accelerate as the situation worsens.

At the end of September, financial comparison website NerdWallet released research showing that 29% of 2,000 surveyed consumers had already stopped paying for insurance cover over the preceding 12 months, with another 11% planning to do so when renewal was due.


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