Why car and home insurance costs are rising while inflation is falling

Young woman having problems with her car.
Motorists are paying an average of £635 for insurance. (Coolpicture via Getty Images)

Households that have recently renewed their home or car insurance are likely to have been shocked by how much their monthly premiums have increased. But with inflation more than halving, why are insurance premiums still climbing higher?

The average quoted price of home insurance rose by 41.6% in the 12 months to April, with the most commonly quoted price for annual home insurance coming in at between £150 and £199, according to data insights company Consumer Intelligence.

It marks the highest yearly increase since Consumer Intelligence began tracking home insurance prices in 2014.

Householders in London saw the largest increase in home cover quotes in April at 49.9% higher than last year. They were closely followed by those in the South East and East of England where quotes soared by 45.8% and 41.9% respectively.

Overall, quoted premiums have risen by 68.8% since February 2014.

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“The market saw inflation during each of the last 12 months. The last three months was the highest recorded in the last 10 years, exceeding the 10% seen in Q3 2023,” said Matthew McMaster, senior insight analyst at Consumer Intelligence.

Customers who previously made claims on a buildings insurance policy were quoted average prices that were 50.3% higher than last year. Those who had not made a claim experienced a slightly lower increase of 40.9%.

When it comes to prices paid rather than quotes, the average home insurance jumped by 19% or £60 annually in the first quarter of 2024, according to figures from the Association of British Insurers (ABI).

The average home insurance (combined buildings and contents cover) premium paid rose to £375, up from £315 in the first quarter of 2023.

While insurance premium increases seem typically to have followed inflation in the past, they have recently shot up significantly more than the average reported rates of inflation.

UK inflation hit a 41-year high in October 2022, accelerating to 11.1% on the back of rising energy and food prices.

It has since come down to 2.3% in March, the lowest in nearly three years, according to figures from the Office for National Statistics (ONS).

When it comes to car insurance, drivers saw premiums rocket by 25% in 2023 compared to the previous year, to the point where the ABI launched an action plan to slam the brakes on costs.

Motorists paid an average of £543 in 2023, up from £434 in 2022. ABI figures showed the average premium in the last three months of 2023 jumped 12% on the previous quarter — up from £562 to £627. In the first quarter of the year premiums rose 1% to sit at £635.

If inflation is coming down, what is pushing premiums well into the opposite direction?

There are a number of factors to consider when determining a premium but the main reason why people are paying more to drive on UK roads are cost pressures for insurers.

Repair costs jumped 32% in third quarter of last year to £1.6bn of the total £2.54bn. This is due to a mixture of cost of labour, energy and vehicles becoming more sophisticated, with electric vehicles requiring ever more specialist expertise to repair.

Other cost pressures reported by insurers during the same period included longer repair times, which drove up the cost of providing replacement vehicles by 47%.

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The end result is that insurers are spending more on claims and costs than they are collecting in premiums.

“We’re acutely aware of the impact that rising motor insurance premiums continue to have on motorists. Rising repair costs and other factors outside of insurers’ control mean there is no single action that could bring down premiums. However, we are determined to do all we can to put the brake on,” Mervyn Skeet, ABI’s director of general insurance policy, said.

Matt Brewis, director of insurance at the Financial Conduct Authority (FCA), said told MPs in April that he had heard "heartrending stories" from people trying to make ends meet as costs such as insurance rise.

"It is clear there is a significant increase in pricing of motor and home insurance over the last two to three years," Brewis told the Treasury committee hearing on the insurance market.

"Motor insurance is the one where we are seeing the greatest level of complaints," Brewis said.

Research from consumer body Which? showed that some people who couldn’t afford to pay their insurance premiums upfront were being charged high interest to do so monthly.

“Motorists need car insurance to be on the road legally, and the vast majority of mortgage lenders will insist on homeowners having cover — yet those who can’t afford to pay for their premiums all in one go are being penalised with eye-watering interest rates,” Rocio Concha, Which? director of policy and advocacy, said

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“The regulator has been clear — paying for insurance monthly is a tax on being poor, and it’s shocking to see providers still trying to justify the practice. Given many firms’ interest rates don’t seem to reflect the modest risk they’re taking on, customers paying monthly are being charged disproportionately more than those paying annually,” she added.

When it comes to house insurance, bad weather is to blame for rising prices, according to the sector.

The ABI said that 2023 was marked by bad weather, with weather-related home insurance claims totalling £573m.

Towards the end of the year, storms Babet, Ciaran and Debi caused £352m of damage to homes.

The insurance body said that flooding is behind the biggest chunk of weather-related damage.

As well as flood defences, Louise Clark, ABI’s policy adviser, general insurance, said: “There are other important steps we need to consider too, including reform of planning laws to prevent home-building on high flood-risk areas and a greater focus on climate-resilient properties.”

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