By Anju Bell, Managing Director, Insurance Consulting and Technology, Robert Treen, Director, Insurance Consulting and Technologyand Stephen Cox,Managing Director, Insurance Consulting and Technology, WTW
We estimate an overall private car burning cost inflation of 5% (the increase in the average cost of motor insurance claims per vehicle year) for 2025 versus 2024, with frequency of claims relatively flat and average cost of claims (severity) increasing at 5%. This is in contrast to the preceding years, which saw significant deviations in both frequency and severity resulting in burning cost inflation of 28% for 2022, 11% for 2023 and -5% for 2024. These patterns were driven by the impact of COVID-19, causing reductions and rebound in frequency in 2020 to 2022; high severity inflation for each of 2022 and 2023 of over 10%; and large and unexpected reductions in frequency for 2024, later rationalised as owing to a combination of speed limit reductions, increased ADAS penetration and cost-of-living-driven behavioural changes.
Our view of severity inflation for 2025 breaks down into Accidental Damage inflation of 1%, the lowest for 12 years, with labour rates flat and second-hand car prices falling; Third Party Property Damage inflation of around 8%, consistent with pre-COVID-19 levels and well above price inflation; and Injury inflation of around 7%, potentially slightly higher than the long-term average. Improvements in first-party claimant capture in line with greater network repair capacity partially explains the disconnect observed between Accidental Damage inflation and Third Party Property Damage inflation.
How is the motor insurance performance cycle changing?
We estimate a 70% gross private car loss ratio for the 2025 accident year together with an overall burning cost inflation of 5%, with frequency relatively flat and severity increasing at 5%.
The insurance performance cycle reflects the interplay between claims inflation and premium rates. 2024 benefitted from the combination of the large and unexpected reduction in frequency, and the earning through of rate put on in 2023. In 2025, premium rates haven’t kept up with claims inflation, resulting in an increased loss ratio.
But it’s not as simple as that. Reported claims inflation is a function of true underlying claims inflation and reserving accuracy. And reserving accuracy itself is impacted by human nature: being quick to put on margins for uncertainty and slow to release them (especially in a statutory reporting context), as seen with the excess severity loads applied across 2022–25. Changing premium rates are not just a function of competition, but are fundamentally related to the ability to forecast trends and to predict, or accurately allow for, external influences.
We see this reflected in the latest cycle, both in terms of shorter duration and amplified change in loss ratios. This cycle length is around four years, whereas previous cycles were close to six years. The loss ratio peak to trough was under 10% points between 2012 Q1 and 2019 Q1 underwriting quarters. The loss ratio increased by 36% points between 2020 Q1 and 2022 Q3 underwriting quarters and then fell by 27% points to 2024 Q1.
Where next for 2026?
Whether the latest cycle is a one off resulting from a shock to the system or whether it represents a new norm of faster and more extreme cycles is hard to say. What is clear, however, is that the starting point for accident year 2026 is worse than 2025: the rate reductions of more than 10% in 2025 will earn through and we expect this to increase expected loss ratios above 2025 levels, even if claims inflation were to remain benign.
Recent years have seen regulatory and legislative change that have materially impacted motor premium rates and claims. While we don’t anticipate in 2026 any developments of the same magnitude as the 2021 Whiplash Reforms, 2022 FCA General Insurance Pricing Practices or the 2025 Personal Injury Discount Rate changes, for example, we can still expect further bar-raising in relation to Consumer Duty. The adoption of AI and the outcome of the FCA’s Mills Review considering how AI will reshape retail financial services will likely have impacts beyond 2026.
More immediate than UK regulatory and legislative change is the exposure to global events. We saw this in recent years with COVID-19, supply chain constraints and economic inflation. The conflict in the Middle East has the potential to trigger another set of both frequency and severity impacts, meaning claims inflation is unlikely to remain stable.
Are you equipped to ride the cycle successfully?
When the cycle is faster and more extreme and the world is increasingly uncertain, better cycle management is key to motor insurers maximising long-term profitability.
The latest cycle is both shorter in duration and amplified in loss ratios. Whether it is a one off resulting from a shock to the system or whether it represents a new norm of faster and more extreme cycles is hard to say.
What does this mean in practice?
Addressing the obvious fundamentals of reserving more accurately, enhancing trend detection, improving forecasting, and increasing pricing and underwriting agility
Achieving the long-desired stronger connectivity across the claims, reserving, pricing, underwriting, capital and finance technical functions
Providing more explicit communication to stakeholders of the drivers of uncertainty, the actions taken for mitigation, and the evolution of how assumptions play out
Acting with awareness of the cost of getting it wrong versus the cost of not grabbing opportunities
And remembering that insurance is not just about point estimates – it’s about embracing uncertainty.
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