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Anyone who recently insured their car was probably shocked by the sharp rise in the cost of driving. Even drivers with long records of accident-free motoring have faced sudden jumps in prices for the policies they legally need to hold.
The latest evidence emerged this week, with the news that the average annual quote for car insurance in the UK rose last year by more than 50 per cent to £995, with 17-year-olds now being quoted an average of £2,877. Those who shopped around improved on the costliest quotes, with an index of policy prices rising by a more modest 29 per cent year on year, but insurance costs are biting hard.
A similar phenomenon has occurred in the US, with insurance rates for urban drivers rising by 20 per cent last year. The post-pandemic surge in inflation for everything from energy to groceries is easing, but the cost of insurance continues to grow: insurers complain of having to pay far more to repair vehicles and compensate for injuries.
One personal result is that I drive even slower than before. Having received the same shock as others, I switched to an insurer that offered a lower premium if I put in my car a tiny box linked to a phone app. It notes how fast I go, and how sharply I brake or turn corners, delivering a cute homily at the end of each journey: “Awesome! Keep up the good driving,” it exclaims, with a digital shower of confetti.
It is humiliating to be patted on the head by an overfamiliar algorithm and to volunteer my data for uses I do not understand, but that is how I roll. It has even changed my behaviour: I used to be tempted to pick up the phone and check for messages when stopped in traffic, but no longer. The app disapproves, and withholds confetti.
The box aside, I was probably favoured in the insurer’s risk assessment model by my credit score, ownership of a home, occupation, marital status and all of the other proxy measures that are used to predict how safely applicants will drive. My inner London postcode presumably counted against me, but you can’t have everything.
It was still expensive, so consider those without my status advantages. A young driver with a poor credit score, living in a rented flat in a town where one has to drive for work, faces a very high obstacle. Insurance has always been more costly for those regarded as higher risks, but it is now in danger of becoming prohibitive.
This has severe economic consequences, and reinforces the reality that financial products are more expensive for the people who most struggle to afford them. Politicians are rightly worried and UK insurers are lobbying for cuts in insurance policy taxes, but policy prices are likely to keep on rising, albeit more slowly this year.
Insurers have a decent case that they are not just profiteering: many were taken by surprise by a sudden jump in repair and claims costs in the past couple of years and suffered underwriting losses. Car parts prices and labour costs rose, and vehicles now include an array of sensors and electronics that are expensive to replace.
There has also been a spate of thefts of luxury cars (a total of 1mn cars were stolen in the US in 2022) and more careless driving. Insurers are not above price gouging — the rate for paying policy premiums monthly can be excessive and UK firms were barred by regulators from charging their existing policyholders more than new customers — but costs have still risen fast.
One way to soften the price shock for younger and poorer drivers would be state intervention. This has already occurred in home insurance relating to climate, with US states including Florida providing cover for homeowners who are unable to get it; the UK’s Flood Re is a joint government and industry reinsurance scheme.
But public car insurance would be even harder to design than flood-zone home insurance: how would any government limit the number it covered? It also risks moral hazard by making insurance for the worst-rated drivers more accessible. Insurance underwriting is far from perfect but younger drivers are indeed riskier on average.
This brings us back to my little black box. A teenager who works in a logistics centre must pay a lot for insurance even if he is a skilled and careful driver. Telematics, as the technology is known, lets him prove it to gain a better price. Being observed also tends to make people drive better: note how cars slow down for speed cameras.
There are plenty of flaws in today’s telematics. It would be preferable if I could store my personal data and port it myself between insurers, rather than it being secured (at best) in one company’s database. The box is not infallible: for all it knows, I could be driving slowly on the wrong side of the road, or through a red light.
That will change: cars packed with sensors could observe how well they are driven, and report back to insurers. As prices rise, the incentive for good drivers to take advantage of this will grow, as will the penalties for being left behind in a bad risk pool. No matter what the pitfalls, money talks.