Premium Drivers A quarterly motor insurance savings index by comparethemarket.com September 2015
Introduction The sixth Premium Drivers report from comparethemarket.com, which analyses the difference between the cheapest and average motor premiums, comes at a time when the era of falling motor insurance premiums is fading into a distant memory. The soft premium market is continuing to harden and there is little sign of this abating in the near future. In the last Premium Drivers report, published in June 2015, comparethemarket.com s data showed that the savings variable had flattened to around the 16% mark, suggesting that competition levels were weak and, critically, indicating that premiums would continue to rise across all age groups 2. This is a result of the last quarter of motor insurance activity, in which the savings variable has remained high, contrary to the traditional summer dip (i.e. an increase in competition). Unfortunately for motorists, premiums have steadily increased too, with an average cheapest click-through 3 premium costing 517.73 in August 2015, up from 493.77 in May an increase of almost 24 over just three months. When we consider the Government s imminent hike in Insurance Premium Tax from 6% to 9.5%, announced in July s Summer Budget, and the continued rise in the cost and number of motor insurance claims, particularly for personal injury 4, we can expect to see a further hike in motor premiums over the next quarter. The era of falling premiums has come to an end. This, combined with the fact that many insurers business models focus on attracting new customers at a discount in order to retain them over a long period to ensure profitability, means that customer inertia is the greatest enemy of competition and, critically, in finding the cheapest cover. The biggest price rises will hit people who automatically renew - as the savings variable indicates, motorists who don t regularly switch insurance provider are likely to pay on average 16% more for their cover. Shopping around and switching insurer remains the best way to keep competition levels high and premiums as low as possible for all age groups. As this report highlights, the savings variable is starting to vary significantly depending on different age groups, which may start to have a positive bearing on the cost of motor insurance for some, whilst having no beneficial impact for others. Since the beginning of the year, comparethemarket.com, through analysing its own motor insurance data, has highlighted the fact that premiums are steadily rising, as competition around pricing has fallen. 1 The average price is calculated by taking the top five cheapest motor insurance quotes on comparethemarket.com, across all age groups. 2 See June iteration of comparethemarket.com s Premium Drivers. 3 Click-through when customers click-through from comparethemarket.com s motor insurance quote page to the insurer whose premium they wish to purchase. 4 http://www.actuaries.org.uk/news/press-releases/articles/liverpool-remains-personal-injury-claims-capital-uk-road-accidents http://www.theaa.com/newsroom/bipi/car-home-insurance-news-2015-q2-bipi.pdf 2
The Savings Variable The savings variable competition fails to pick up in traditional hot season for motor insurance The Premium Drivers Index analyses the monthly percentage difference or the savings variable between the cheapest and average quote across all age groups. This is tracked throughout the year and compared quarter on quarter. The savings variable tells us something about current and historic prices, it also provides insight into the motor insurance sector. It highlights cyclical trends and allows comparethemarket.com to make statistic-driven predictions on the future direction of the motor insurance market. If the difference between the cheapest and the average price is narrowing, it is a contracting market; if the price disparities are widening, then it is a dispersing market. Comparethemarket.com s Premium Drivers research has found that, whilst the savings variable stayed broadly flat over the quarter, it is up by more than 7% compared to August last year in relative percentage terms. Furthermore, when comparing the savings variable over the past two years, it is clear that the difference between the cheapest and average motor premiums is widening at a steady, but significant, pace. In August 2013 the savings variable stood at 14% and in August 2014 it grew to 14.8%. Now, in August 2015, the savings variable has risen to 15.9% 7.4% relative growth from the last year and 13.6% up compared to two years ago. Over the last quarter, the savings variable crept up steadily, rising 0.6% relatively per month 15.7%, 15.8% and 15.9%. Competition, measured by a fall in the savings variable, is historically high in the summer months of June, July and August. On this occasion however, competition has not only failed to pick up in any significant way during the summer, but it has even steadily dwindled. It would appear to be moving back towards its January high. Simon McCulloch, Director of Insurance, comparethemarket.com, comments: The summer months are traditionally a very competitive time for car insurance, as cheapest prices plunge to annual lows and insurers fight for custom as they start to focus on hitting their year-end underwriting targets. However, we have not seen competition pick up in any material way in fact we ve seen a slight reverse. This would appear to suggest that premiums will carry on climbing for drivers. However, it is not all doom and gloom. Those hit hardest by rising premiums are always those who choose not to shop around for the best price. The savings variable is the difference between the cheapest - or shop around - and the average - or auto-renewal price. This gap is widening and is significantly larger than the previous two years. The message is clear if you auto-renew you are likely to be paying significantly over the odds, so it s more important than ever to shop around for your motor insurance each year. 3
Key Statistics Year on year the savings variable has expanded by over 7% in relative percentage terms, growing from 14.8% to 15.9% The savings variable in August 2015 was almost 13% higher in relative terms than it was in the same month two years ago The savings variable has risen gradually through the last quarter, rising 0.1% per month and heading back towards the yearly high Savings variable across all age groups in 2013-2015: 2013/2015 Month December January February March April May June July August September October November December January February March April May June July August Savings Variable % 16.5 15.4 15.0 14.7 14.6 14.2 14.6 14.7 14.8 16.7 16.9 17.1 17.1 16.4 16.2 16.0 16.2 16.1 15.7 15.8 15.9 4
What s the cost? Key Statistics Price difference between cheapest and average premium has grown to 97.95 over the last quarter its highest point in 2015 Price difference in August 2015 ( 97.95) is more than 20 greater than last August a rise of 27% Cheapest premiums have risen sharply over the quarter to 517.73 across all age groups an increase of almost 24 per premium Avg. price Cheapest price 650.00 600.00 550.00 500.00 450.00 400.00 Jan 13 Mar 13 May 13 Jul 13 Sep 13 Nov 13 Jan 14 Mar 14 May 14 Jul 14 Sep 14 Nov 14 Jan 15 Mar 15 May 15 Jul 15 With the savings variable showing that competition has failed to increase significantly and in fact has started to decrease once more, the price difference between the cheapest and average premium has risen accordingly. The price differential between cheapest and average premiums has grown to 97.95, the widest gap this year. The lack of competition is easing pressure around pricing and this is leading to prices going up across the board. Cheapest premiums across all age groups in August this year are just over 75 more than they were in August last year, standing at 517.73 compared to 441.90 in 2014. Prices have risen over the last quarter too. However, prices are going up faster for average, or auto-renewal, premiums than they are for the cheapest, or shop around premiums. Whilst cheapest premiums in August have risen by 23.96 since May ( 493.77 to 517.73) average premiums have gone up by 27.50 over the quarter and 96.78 over the last year 5. 5 In August 2014 the average premium across all groups was 518.9. The average premium has risen to 615.68 in August 2015. 5
Cheapest/Average price differential December 2013 to August 2015: 2013/2015 Month December January February March April May June July August September October November December January February March April May June July August Savings Variable % 100.96 85.96 80.94 77.34 77.35 74.71 77.43 77.48 77.01 88.87 93.18 96.75 104.04 91.98 91.06 90.95 94.73 94.41 94.30 95.07 97.95 Simon McCulloch observes: In the current tough market conditions, insurers are even more likely to steadily raise the cost of people s renewal quotes. The reality is that, on average, automatically renewing your car insurance will cost you about 100 extra a cost that few people would be happy to bear. In most cases, being loyal to your current car insurance provider doesn t benefit motorists. As people start to notice that their premiums are rising, we hope that more drivers start to shop around and save themselves significant sums of money. The gap is only going to get bigger as prices rise and competition falls. 6
Prospect of falling premiums for young drivers at expense of all other age groups Key Statistics Price competition is increasing for under 25s, evidenced by the narrowing savings variable with price competition falling across all other age groups Greater price competition indicates that premiums for young drivers could start to fall Higher competition in the younger driver category could be driven by the rise in popularity of Telematics policies, which are increasingly one of the most cost-effective options for young motorists One of the most interesting findings in this iteration of Premium Drivers is that, despite the savings variable being significantly up year on year when factoring in all age groups, the savings variable for under 25 year olds has fallen dramatically over the last year. Aggregating both 17-20 and 21-24 age groups, the savings variable has fallen from 21.2% in August 2014 to 19.2% in August 2015 a fall of 9.4% in relative percentage difference. This means that the falling savings variable over the year amounts to a reduction of 21.18 difference between the cheapest and average premiums. When considering the high prices associated with under 25 year olds car insurance, an increase in price competition for young drivers is particularly welcome, as it is an essential component to driving down prices. However, the price difference between the cheapest and average price for under 25 year olds remains at an average of 229.89, illustrating the vast difference between shopping around and automatically renewing. SAVINGS VARIABLE YEAR ON YEAR COMPARISON August 2014 August 2015 Difference Relative Percentage Difference Drivers under 25 21.2% 19.2% -2% -9.4% Drivers over 25 11.8% 12.8% 1% 8.5% 7
One of the possible explanations for this increase in price competition is a rise in the popularity and number of telematics policies for under 25 year olds. According to comparethemarket.com data, over three quarters (77%) of under 25 year olds see at least one telematics premium in their cheapest five prices up from 62% last year. Furthermore, telematics policies are now the cheapest option for almost half (49%) of under 25 s up from 30% last year. This indicates that telematics policies are becoming increasingly commonplace and competitively priced, which may be helping to significantly drive up competition in this age group. Simon McCulloch says: After a period of steadily increasing premiums across all age groups, we are now seeing a growing divide emerging between younger and more experienced drivers in relation to car insurance costs and surprisingly, not in the way we would expect. Despite the fact that prices for young drivers (17-25 year olds) have continued to rise slightly, price competition for this part of the market is actually increasing. This is signified by the savings variable tightening from 21.2% to 19.2% between August 2014 and August 2015; the trend for all other age groups is of premiums rising further still and price competition relaxing even more, indicating that there will be no downward pressure on prices in the immediate future. However, if price competition continues to be high for young drivers policies, we may in fact see premiums decline for under 25s whilst they continue to rise for everyone else. This will particularly be the case if telematics policies continue their rise in popularity and price competitiveness. Telematics policies give younger motorists the chance to prove they are a good risk for insurers, pushing premiums down for the best drivers. Hopefully this will lead to safer driving habits and cheaper premiums too. 8
Methodology All data, other than that referenced in the footnotes, is sourced from comparethemarket.com. When the average price is referred to, this is the mean average of the top five cheapest prices presented to a customer, where a consumer has clicked through to buy. Buying from the top five cheapest prices presented represents 90% of all car insurance sales. When the cheapest price is referred to, this is the average cheapest price presented, where a customer has clicked through to buy. All premium data refers to motor insurance products featuring comprehensive, third party fire and theft or third party cover. 9