Car insurance warning as rising payouts mean insurers are only just breaking even

By HARRY WISE

Motor insurers are set to just about break even this year before falling to a loss in 2026, warn industry forecasters. 

Analysts at EY expect higher claims inflation and falling car insurance premiums, driven by heightened competition between insurers, will impede profitability.

It forecasts the UK motor insurance market will have a net combined ratio (NCR) - a measure of underwriting profitability - of 100 per cent in 2025, followed by 107 per cent next year.

Any number above 100 means insurers pay out more in claims and expenses than they receive in consumer premiums.

EY anticipates premiums falling by 6 per cent this year but then starting to rise again, with a 5 per cent increase pencilled in for 2026.

A squeeze on insurers will lead many motorists to fear the return of big jumps in car insurance costs after a recent respite. 

Profitability: Motor insurers will just about break even this year before falling to a loss in 2026, according to new analysis from EY 

Premiums jumped by 14 per cent last year as insurers sought to offset higher costs resulting from adverse weather conditions, as well as rising raw material and spare parts costs.

This helped the UK motor insurance sector achieve a combined operating ratio of 97 per cent despite paying out a record £11.7billion in claims.

Premiums started going up in 2022 after the loosening of Covid-related lockdown restrictions led to people travelling in their vehicles more regularly.

While EY expects them to increase next year, it warned that car insurers will probably shrink 'deeper into the red' due to soaring claims costs.

Dan Beard, UK insurance partner at EY, said: 'Following just one year of underwriting profitability in the last three, UK motor insurers are once again bracing for challenge in an increasingly uncertain market.

'The rapidly changing geopolitical, economic and regulatory picture, alongside increasing levels of consolidation, are posing very real challenges to motor insurers as they look to steer their pricing and portfolios.'

'Despite this testing environment, insurers will be keenly aware of the need to continue to support customers with better propositions whilst carefully managing costs and delivering on regulatory commitments.'

EY's forecasts come amid significant consolidation in the car insurance industry.

Aviva has agreed to buy Direct Line Group for £3.7billion, while Ageas intends to acquire Esure from private equity giant Bain Capital in a £1.4billion deal.

Car insurance bills have rocketed in recent years, so comparing rival policies to find the best deal is vital.

Many drivers have discovered renewal quotes have shot up by hundreds of pounds, but searching for better deals on comparison sites can deliver much keener rates.