The Financial Conduct Authority (FCA) has confirmed this week that a steep rise in UK motor insurance premiums has largely been driven by rising external costs, not inflated insurer profits, but has warned of persistent shortcomings in how some insurers are managing claims.

In an analysis, the FCA revealed that the increasing cost of settling motor claims, driven by higher prices for vehicles, parts, labour, energy, and more complex supply chains, is the main cause behind recent premium hikes.

Additional pressure has come from rising costs for hire vehicles, a surge in theft claims, and an increase in uninsured drivers.

Despite these external factors, the regulator flagged concerns around poor claims handling practices that may be compounding the problem. In particular, referral fees from credit hire firms and claims management companies were linked to slower claims processing and higher costs for both consumers and insurers.

While the FCA observed good practices in parts of the home and travel insurance sectors, its investigation also exposed worrying failings across the industry. These include:

• Weak oversight of outsourced services, leading to delays and high volumes of complaints;
• Inadequate management information, resulting in unresolved claims issues;
• A low payout rate for storm damage claims in 2024, with only 32% of claims honoured in a sample of firms; and
• Over-reliance on cash settlements, often without assessing whether they were in the customer’s best interest.

The FCA said it is addressing poor practices directly with individual firms, including taking regulatory action where necessary. It is also feeding its findings into the Government’s motor insurance taskforce to help drive coordinated action between regulators, industry, and policymakers to tackle rising costs.

The regulator stressed, however, that while such collaboration could help mitigate price increases, it will not be able to prevent them entirely.

Premium finance market under FCA spotlight

Also released this week was an interim update from the FCA’s ongoing market study into premium finance — the additional cost consumers face when they choose to pay their insurance monthly instead of annually.

While premium finance can offer greater affordability and flexibility, the FCA warned that some firms are profiting disproportionately from offering this service, charging significantly more than the cost of providing it. The next phase of the study will delve deeper into these concerns, using the Consumer Duty to ensure firms deliver fair value. A final report is due by the end of 2025.

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.

“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, particularly in home and travel. 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.”

The FCA also published a review of its pricing reforms, which showed they have successfully narrowed the price gap between new and existing customers in both motor and home insurance. The reforms have curbed the practice of “price walking,” where loyal policyholders were penalised with higher renewal premiums.