Investment Comment
9th February 2024
Fast car
Imagine the unexpected delight for an economist to listen to tales in the pub over a post dry-January beer and be able to relate them to the economic data. Insurance prices shooting up generally results in quite a bit of annoyance, for fellow drinkers (and non-drinkers alike). Occasionally, an anecdotal story prompts a quick look at the underlying data.
Car insurance inflation rose by 43% over the 12 months to January 2024, slightly lower inflation than the 50% year-on-year change seen in Autumn 2023, but prices are still rising. For those with teenagers seeking to insure their ‘first’ car, insurance inflation for drivers aged 18 rose 84% in 2023 according to Confused.com.
Interestingly, and perhaps annoyingly, the data in the charts below suggests that this appears to be a UK motor insurance inflation problem. Some of this may be due to the ending of the loyalty penalty, where insurance companies were in the habit of offering new customers better (lower cost) insurance deals compared to renewals for existing customers. This was seen as punishing those customers who didn’t move between insurers.
International comparisons: Motor insurance inflation (year-on-year %)
Source: Artorius, Bloomberg
Since the beginning of 2016, UK motor insurance has risen by 90%, whilst insurance costs in France and the US have risen by much less
Source: Artorius, Bloomberg
The insurance industry has put forward explanations to explain the higher prices. These include the increased level of traffic on UK roads (more traffic results in more accidents), but the primary reason appears to be the increased level of inflation in costs of repairs, both of parts and labour.
Claims data from the industry body, the Association of British Insurers (ABI), shows a clear picture of spiking costs for insurers: payouts for vehicle thefts rose 35% in Q3 2023 (vs Q3 2022), longer repair times drove up the cost of providing replacement vehicles by 47% in the same period and the cost to replace written-off vehicles has increased as the average cost of new cars rose - up 43% over a five-year period.
However, the largest single factor in absolute terms is repair costs. They jumped 32% in Q3 to £1.6bn of the total £2.54bn of overall claims. This reflects a mixture of the increased costs of labour and energy and also the fact that vehicles are becoming more sophisticated, with the likes of electric vehicles requiring ever more specialist expertise to repair. Early research suggests that electric vehicles are approximately 25% more expensive to repair than their petrol equivalents and take 14% longer to fix.
The end result is that insurers are spending more on claims and costs than they are collecting in premiums. Analysts at Ernst & Young (EY) estimate that in 2022 for every £1 motor insurers received in premiums, they paid out £1.11 in claims and operating costs. EY also forecasts that in 2023, insurers will have paid out £1.14 in claims and operating costs for every £1 received in premiums, i.e. insurance hasn’t been an egregiously profitable business of late.
The UK listed insurer, Admiral, reflects these dynamics. Over the past few years revenues have been rising, and revenue for 2024 is expected to grow by over 40% according to the forecasts on Bloomberg. Profits are expected to rise by 16% in 2024 but this is from a low base as premiums are catching up with the historic inflation of repairs.
As a quick aside for what might also be useful pub chatter, I highly recommend ‘Material World’ by Sky News’ Ed Conway, which takes a deep dive into the stuff (sand, salt, iron, copper, oil and lithium) that our ‘modern’ world relies on, for anyone wanting to see how and why ‘stuff’ is in such demand.
A new rule for labour
Recent economic data in Europe and the UK are striking. Low growth of the economy (as measured by Gross Domestic Product, GDP) has been a feature over the past few years, once the post-Covid bounce in 2021 had passed. Despite this, unemployment has remained low compared to the past 30 years. There are signs that unemployment is rising (albeit very slightly) in the UK, German and the US, but from levels that are indicative of a labour market that signals full employment.
Despite virtually no economic growth in 2023, unemployment has remained very low in the UK
Source: Artorius, Bloomberg
French unemployment is at decade lows, despite weak growth in 2022 and 2023
Source: Artorius, Bloomberg
With falling rates of inflation, Central Banks around the world are expected to cut interest rates through 2024. This should lift economic growth, and in turn prompt further demand and job creation. The recruitment company, Indeed, tracks wage inflation via companies seeking to recruit.
Indeed’s data reflects that wage inflation has slowed (albeit not by much in the UK). This maybe an indicator worth watching as and when economic growth starts to recover. Central Banks will be wary of allowing too much wage inflation before cutting interest rates.
Wage growth has slowed but remains more elevated that pre-Covid rates, and the path of interest rate cuts 2024 may be driven by wage pressure rather than headline inflation
Source: Indeed
All expressions of opinion reflect the judgment of Artorius at 9th February 2024 and are subject to change, without notice. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete; we do not accept any liability for any errors or omissions, nor for any actions taken based on its content. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. Past performance is not a reliable indicator of future results. Nothing in this document is intended to be, or should be construed as, regulated advice. Artorius provides this document in good faith and for information purposes only. Reliance should not be placed on the information contained within this document when taking individual investments or strategic decisions. Artorius Wealth Management Limited is authorised and regulated by the Financial Conduct Authority. Artorius is a trading name of Artorius Wealth Management Limited.
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