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Motor insurance: why premium prices might remain subdued in 2017

01.12.2016

On the face of it, last week’s Autumn Statement was bittersweet for the motor insurance industry. The good news is that the government announced plans to push ahead with legal reforms to cut compensation for whiplash injuries which are costing insurance companies c£1bn a year. Insurers cheered this news and pledged to pass on the savings to motorists.

The bad news is that insurance premium tax is going up again in June 2017 with indications that further hikes in this levy are also being planned. This latest rise means that although this tax on insurance will have doubled (6% to 12%) since last year, it’s still a long way below the 20% VAT rate that many believe is where it will ultimately end up.

According to the Association of British Insurers, the rises in insurance tax have added around £26 to the average motor insurance premium. Interestingly, however, the government claims whiplash reform will save motorists £40 a year. A classic case perhaps of the government giving with one hand and taking with the other.

So what?
All of which prompts the question: with premiums increasing - and set to rise further until any whiplash reforms are implemented - how will motorists and insurers respond?

Conventional wisdom suggests that because motor insurance is highly commoditised, upwards of 80% of motorists pick a provider based on cost according to our Financial Research Survey (FRS), any increase in price will encourage switching activity.

This is borne out in the figures. After falling to its lowest level since before the financial crisis last year when premiums prices were also falling, figurers from the FRS indicate that switching levels are now on the rise. A higher proportion of motorists are also actively renewing (renewing with their current provider but taking out at least one quote).

Moreover, new regulations recently announced by the FCA compelling providers to disclose prior year premiums on renewals could further encourage switching activity. From April 2017, insurers will have to put the previous year’s price in a prominent position on renewal quotes.

Taken altogether then, the hope is that increased switching will foster greater competition between insurers and help keep a lid on premium price increases despite higher insurance tax.

Of course, none of this is guaranteed, and it could even backfire if some insurers pull out of the motor market altogether. But my abiding impression is that this scenario won’t happen and the competitive nature of the market will help keep prices relatively subdued next year.

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