The state of motor insurance in the UK

The motor insurance industry is at a critical juncture, facing both unprecedented challenges and opportunities. The latest data from the Association of British Insurers (ABI) reveals that motor insurers paid out a record £11.7bn in car insurance claims in 2024, a spike largely driven by increases in theft and repair costs due to inflation and claims inflation. Yet, despite these rising costs, average premiums have fallen quarterly since reaching record highs in Q4 2023, placing greater pressure on insurers’ margins. With this pressure on margins looking to persist throughout 2025, insurers must adopt innovative strategies to navigate these turbulent waters and ensure sustainable growth.

What’s driving change in the UK motor insurance market?

UK motor insurers are currently experiencing tighter margins as a result of declining premiums and increasing claims costs. According to Confused.com, premiums have decreased by 17%, mirrored by a 17% increase in total claims payouts. Throughout the year, insurers processed 2.4 million motor insurance claims, with the average private motor insurance claim rising by 13% to £4,900. Vehicle repair costs alone amounted to £7.7bn, marking another record high. Theft-related claims peaked in Q4 2024, with an average payout of £11,200.

According to Confused.com's car insurance price index, the average annual cost of UK motor insurance decreased to £834 in Q4 of 2024, down from £995 in Q4 of 2023. This drop contradicts rising UK Consumer Price Index (CPI) figures for transport maintenance, repairs, and spare parts, suggesting a potential lag between real costs and insurers’ ability to fully reflect them in premiums. Disparities in underwriting risk also persist: Bloomberg reports that the median quote for a Skoda was 39% higher than the cheapest quote for a Ferrari, which saw a 25% quote reduction, raising questions about pricing accuracy and underwriting models.

The US trade tariffs are expected to further drive claims inflation. While the US President and UK Prime Minister signed a bilateral trade deal, rising repair costs due to global supply chain disruptions and new US auto tariffs may affect UK insurance premiums and claims, particularly for vehicles requiring imported parts or specialised repairs, such as luxury or electric models. These tariffs are expected to ripple through the EU, increasing the cost of car parts and repairs across the region. As sourcing vehicle components becomes more expensive globally, EU manufacturers and suppliers will face higher import costs, translating into pricier repairs and maintenance and forcing insurers to settle claims at inflated rates. The Society of Motor Manufacturers and Traders (SMMT) highlights that the UK automotive industry depends heavily on the European supply chain, with around 60% or more of components imported from the EU.

In parallel, The FCA has launched a competition market study to evaluate the fairness and competitiveness of premium finance for motor and home insurance, addressing concerns about high yearly rates (20–30%) and the overall value offered. The study will examine product value, customer awareness, commission roles and competition barriers, impacting over 20 million users, including 79% of adults in financial difficulty. As part of this, the FCA will investigate increased motor insurance costs, claims handling and the impact on various customer groups, such as younger and older drivers, ethnic minorities and low-income individuals. An interim report with findings and proposed actions is expected in the first half of 2025, potentially adding further pressure on insurers’ already tight margins.

Meanwhile, the ABI's 10-Point Roadmap outlines steps that the industry and government can take to tackle insurance costs. Progress has been made in key areas such as tackling vehicle theft, cracking down on insurance fraud and helping consumers make informed decisions. However, significant cost pressures remain, and the industry faces a challenging road ahead.

The consumer price index for auto parts has jumped in the past three years, and this trend looks set to continue, with input costs seemingly on an upward trajectory. Commodities, such as steel, have been volatile in the past year, with supply chain challenges remaining an issue. As labour costs climb, vehicles will become more expensive to fix, while motor insurers may face mounting personal liability costs for accident victims.

4 innovative approaches to lower insurance premiums

To address these challenges, insurers are exploring various innovative approaches to lower policy premiums and save costs for both consumers and providers.

Telematics

Telematics and Usage-Based Insurance (UBI) have transformed insurance into a personalised service. By monitoring driving behaviour, such as speed, braking and time of travel, insurers can offer UBI that rewards safer drivers with lower premiums. This is particularly effective for young drivers and fleet operators, where risk profiles vary significantly. Telematics also supports proactive risk management and driver coaching, further reducing long-term risk exposure.

Insurers are also increasingly using gamification and reward-based systems to promote safe driving. Mobile apps track driving behaviour and offer incentives such as cashback, discounts or vouchers for consistently safe driving. These programmes not only reduce accident frequency but also foster long-term behavioural change.

Flexible policies

Flexible insurance models, such as pay-per-mile or pay-as-you-drive, are gaining popularity among low-mileage drivers and businesses with underutilised fleets. These models align premiums with actual usage, offering a fairer and often more affordable alternative to traditional fixed-rate policies. They also encourage more mindful vehicle use, indirectly contributing to reduced road congestion and emissions.

Internet of things

The Internet of Things (IoT) is enabling real-time vehicle diagnostics. Sensors can monitor tyre pressure, engine health and maintenance needs, allowing insurers to offer discounts for well-maintained vehicles. Vehicles equipped with advanced driver-assistance systems (ADAS) and regular service records are seen as lower risk, making them eligible for preferential pricing.

Integrated insurance

Insurers are increasingly integrating insurance into the vehicle purchase process through partnerships with original equipment manufacturers. Embedded insurance allows customers to activate coverage at the point of sale or via in-car systems, creating a more seamless experience. For insurers, this opens new distribution channels and access to real-time vehicle data, enabling more accurate underwriting and dynamic pricing.

Leveraging technology for risk assessment and claims management

Artificial intelligence (AI) and machine learning are transforming both underwriting and claims management. AI models analyse vast datasets, including historical claims, traffic patterns and other data to create more accurate and dynamic risk profiles. On the claims side, AI-powered platforms automate damage assessment through image recognition. They also streamline documentation and facilitate faster payouts, helping to reduce administrative overhead and improve customer satisfaction.

However, digital transformation also introduces new risks. Fraudulent claims remain a significant cost driver. Insurers are deploying AI and behavioural analytics to detect anomalies, identify staged accidents and flag suspicious activity in real time. These tools not only reduce fraudulent payouts but also help maintain fair pricing for honest policyholders.

What does the future hold for the UK car insurance industry?

The future of the UK motor insurance industry will depend on a complex mix of technological advancement, regulatory scrutiny and global economic pressures. 

While technologies like ADAS and telematics improve safety, they also increase repair costs due to expensive sensors and electronics, with Epyx reporting a 35% rise in common part prices since 2020. Cybersecurity is another growing concern. As vehicles become more connected, they’re increasingly targeted by cyberattacks and theft. Insurers must now factor in digital threats and consider offering cyber cover.

The rise of autonomous vehicles presents both a disruptive challenge and a strategic opportunity for the sector. As liability shifts from driver error to product and software faults, insurers must fundamentally rethink underwriting models, risk assessment and the role of traditional motor insurance in a world where human drivers may no longer be the primary risk factor.

Regulatory developments in the industry are also adding further complexity. The FCA’s market study into premium finance could lead to reforms affecting over 20 million policyholders, and particularly vulnerable groups. Meanwhile, the ABI’s roadmap calls for continued focus on road safety, support for new drivers and adoption of safety technologies.

Global trade tensions are also compounding the pressures, with US auto tariffs and ongoing supply chain disruptions driving up the cost of claims. As a result, insurers could face inflated claim settlements and extended vehicle downtime.  Moreover, the uncertainty surrounding future trade agreements and geopolitical instability adds volatility to cost forecasting, making it more difficult for insurers to price risk accurately and maintain profitability.

Key takeaways: how insurers can future-proof their business

The UK motor insurance market in 2025 is at a crossroads, facing evolving risks, rising costs from global trade, and regulatory scrutiny, all while consumers demand affordability and require fairness. With record-high payouts and shrinking margins, insurers must pivot from traditional models to tech-driven, customer-centric strategies.

To thrive in a highly competitive market, firms will need to pivot and embrace:

• Telematics and usage-based models that personalise pricing and reward safe driving.
• AI and automation to improve underwriting accuracy, streamline claims and detect fraud more effectively.
• Flexible, embedded and IoT-enabled policies that align with evolving mobility trends.
• Proactive regulatory engagement to shape fair and future-ready frameworks.

As the Financial Services Growth and Competitiveness Strategy release nears, insurers have a unique opportunity to redefine value, rebuild trust and future-proof their operations. The road ahead is complex, but with innovation and collaboration, the industry can drive toward a more resilient, inclusive and sustainable future.