What is driving car insurance premium hikes?

The cost of car insurance is a regular gripe among drivers but research suggests premiums aren’t actually all going back into insurer profits.

While you may be trying to cut the costs of your car insurance, analysis by the Financial Conduct Authority (FCA) suggests that increases in the cost of motor claims are actually the main factor in car insurance premium hikes that have hit motorists in recent years.

The City watchdog launched a review of the car insurance sector amid concerns of the growth in premiums since the pandemic and through the cost of living crisis.

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There are many factors that impact premiums, such as the day you purchase car insurance, and though the typical car insurance costs may have dropped in recent months, the average premium increased from £443 to £545 between 2019 and 2023 - a 23% jump.

The rise coincided with inflation hitting double digits in 2023, with higher energy bills also putting pressure on households.

But the FCA’s research has found that car insurers aren’t actually at fault and it is the cost of claims that has gone up, meaning customers are paying more in premiums for potential repairs.

Sarah Pritchard, deputy chief executive of the FCA, said: “Insurance provides peace of mind but people must be confident they can get a fair deal and be treated right when the worst happens.”

Are insurers profiting from car insurance premiums?

It is easy to blame your insurer when you receive a car insurance renewal.

The FCA has already introduced rules to stop insurers from favouring new customers over existing ones, while it is also important to shop around otherwise inertia can leave you paying more.

But the regulator’s research suggests some costs are simply outside an insurer’s control.

Just as consumers have been hit by rising prices, garages are also paying more for parts, labour, energy and more complex cars and supply chains.

The cost of hire vehicles, the number and cost of theft claims and uninsured drivers have also risen significantly, the FCA said.

For example, the Motor Insurers’ Bureau said the cost of claims associated with uninsured drivers has risen from £328 million in 2019 to £452 million in 2024.

Overall, the typical claim cost has increased by 37% between 2019 and 2023 to £3,293 on average.

It is up to insurers how much of this they pass on but ultimately it is the customer who pays for higher claims costs in their premiums.

There were a couple of areas where the FCA has raised concerns including on referral fees from credit hire firms and claims management companies, which it said have slowed down claims and increased costs.

The FCA also said some firms are making “much more money” than it costs to let people pay for insurance on a monthly basis, which it is exploring further for its next stage of the market study.

Pritchard added: “External cost pressures are primarily to blame for recent motor premium increases, not increased firm profits, but there is some more work to do on claims handling.

“That’s why we’re stepping up - making sure claims are handled promptly and fairly and pushing for a coordinated effort to tackle the root causes of rising motor premiums.

“A well-functioning insurance market helps consumers navigate their financial lives and supports growth by building people’s resilience to financial and personal shocks.”

Hannah Gurga, director general of the Association of British Insurers, said the FCA's findings confirm that record-breaking claims costs are behind recent increases in motor insurance premiums.

She added: "(The FCA) demonstrates that many of these cost pressures - such as rising vehicle repair costs, part shortages and increased thefts - stem from issues beyond the industry’s direct control, making collaboration essential to find sustainable, long-term solutions."

How to cut your car insurance costs

The FCA has suggested the government could help boost the supply of skilled labour to reduce repair delays and durations and labour costs and suggested there should be higher penalties for insured drivers.

There are steps that policyholders can take to cut their car insurance premiums such as shopping around, considering the type and level of cover you need or purchasing a vehicle in a lower tax bracket.