by Emma Fuller, Partner, DAC Beachcroft, and Pete Allchorne, Partner, DAC Beachcroft
Insurers have known for a long time that claims costs have been outpacing general inflation, and the recent FCA report on motor insurance claims analysis proves it. Between 2019 and 2023, whilst inflation rose 21%, claims costs increased 34%.
This trend shows no sign of abating for several reasons.
Vehicle costs and complexity
Vehicles are becoming more expensive. From 2014 to 2024, the average purchase price of a car in the UK increased by 89%. During that same period, the consumer price index rose by less than 37%. And because of changes to vehicle technology, the trend towards increasing vehicle costs is picking up rather than slowing down.
Battery electric vehicles (BEVs) are, at present, 20-40% more expensive than equivalent models powered by internal combustion engines (ICE). The average cost of an EV battery is currently £8,000 to £10,000. Whilst the cost of batteries is falling, they still have a long way to go and probably will not reach parity with ICEs by 2030, when new ICE vehicles will no longer be available in the UK.
BEVs cost approximately 35% more to repair than ICE vehicles. This is partially due to the fact that EV batteries are replaced due to a general fear of risk of fire.
The cost of newer ICE cars is also increasing because of the increased use of Advanced Driver-Assistance Systems (ADAS), and, as with BEV technology, ADAS increase repair costs. A recent study suggests that ADAS-related repairs and recalibrations alone cost more than £300 million per year in the UK, and these can be needed even after minor collisions. It’s likely these costs will continue to increase as newer ADAS-equipped vehicles replace older vehicles in the fleet.
Parts for BEVs and ADAS are more difficult to obtain and often have to come from overseas, increasing repair times and storage costs.
Increased vehicle value has also caused an increase in the cost of theft claims. Though the number of thefts is down, the increased value of individual claims means they account for 10% of the overall rise in total claims costs between 2019 and 2023.
While the outlook for claims costs does look bleak, the industry is taking several steps to help lower costs. It’s working with the automotive industry to reduce repair costs whilst also advocating for safety-focused vehicle technology that will continue to reduce the number of claims.
The ABI’s work with government and relevant stakeholders to improve road safety and improve the skills of new and novice drivers will also have a positive impact on the volume and severity of claims.
And the establishment of programmes to reduce the number of stolen vehicles and instances of fraud, should help to reduce the extra costs insurers experience because of these.
Labour shortages
The UK has experienced a shortage of suitably trained and qualified repair technicians for several years. With the increase in BEVs and ADAS-equipped vehicles, which require new qualifications, the problem is likely to get worse.
The Institute of the Motor Industry predicts there could be a shortage of around 16,000 BEV-qualified mechanics by 2032.
A skills and facilities shortage will cause direct repair costs to increase as technicians can command higher wages, which will be passed on to customers, many of whom are insurers. It will have knock-on effects as well. Delays will increase storage costs and increase the length of credit hire periods.
The labour shortage is not limited to technicians. A shortage of care workers has caused an increase in care costs associated with long-term care for those suffering life-altering injuries following a road traffic accident, and there is no sign of either shortage improving in the near future.
To address this, the ABI has been working closely with the government, Thatcham Research and the Institute of the Motor Industry to develop solutions to tackle this labour shortage and skills gap.
Micromobility
An increased use of micromobility (e.g. e-scooters and e-bikes) has resulted in uninsured riders causing approximately £50 million in bodily injury costs annually. At present, the MIB is the compensator for third-party injuries involving illegal use of private e-scooters. As long as these devices are classed as motor vehicles and are illegal on roads or other public places, the MIB is liable for all third-party claims.
The government is showing no signs of tackling the illegal e-scooter epidemic, even though the number of devices increases every year. Additionally, the number of e-bikes that don’t conform to regulations also continues to increase, and these devices are often heavier, faster and more likely to cause more damage than legal e-bikes.
Injury
Bodily injury claims experienced a 7% increase in value from 2019 to 2023. This is a noticeable difference from every other type of claims cost, which increased over 40% during the same timeframe.
The number of injury claims dropped significantly over the period due to various reasons, including changes in driver behaviour, improvements to vehicle safety and reductions in urban speed limits.
Though the number of injury claims has gone down, this is more than offset by the increases to the value of individual claims. Higher value injury claims are made more expensive by rising care costs, prosthetics and other medical aids. More lower value injury claims are also exiting the Small Claims Track, which has an upper value limit that has not been lifted to account for inflation in many years. So more lower-value claims are now incurring legal costs.
Insurers should consider pressing this point when responding to the Ministry of Justice’s planned review of the whiplash reforms, or see the benefit of the existing reforms eroded.
The ABI continues to advocate strongly for legislative reforms around the personal injury discount rate and whiplash injuries, given the importance of fair and proportionate compensation.
A note on mediation
The recent introduction of compulsory mediation in all non-personal injury small claims cases brings a significant development to the claims process.
The mediation process that is being adopted sees a court-appointed mediator spending up to an hour speaking to the parties (who do not speak to each other directly) in an attempt to bring them together and conclude a settlement agreement.
This new process may not help with controlling costs. Preparation for the calls and the mediations themselves add further steps, and hence time and costs, to the claims process. It remains to be seen how far these will be ameliorated by any early settlements that are achieved. A major issue, however, is that many cases referred to mediation are likely to be unsuitable at the time the referral is made and it may be that little is achieved.
We could also see third parties offer their services in these mediation processes, which would add more claims costs.
Compulsory mediation remains in its infancy, and it will inevitably take some time to settle down and for its effects to become clear. However, it is unlikely that compulsory mediation will end with small claims track non-personal injury claims. The direction of travel is becoming clear, and it is unlikely that compulsory mediation will be limited to the small claims track. Rather, over time, we should expect to see various forms of ADR applied to higher-value claims.
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