Insurers have been told by the Financial Conduct Authority (FCA) to improve their claims handling, following “concerning” evidence of poor practices in some cases.
The regulator said that, while rising motor insurance premiums are largely driven by external cost pressures, shortcomings persist in how some insurers handle claims.
FCA analysis indicated that increases in the cost of motor claims – due to higher prices for cars, parts, labour, energy and more complex cars and supply chains – have contributed to premium increases.
The cost of hire vehicles, the number and cost of theft claims and uninsured drivers have also risen significantly. This confirms that increased costs outside of firms’ control, rather than firm profit, were the biggest cause of recent premium rises in motor insurance.
But the FCA did identify that referral fees from credit hire firms and claims management companies were associated with slower claims processing and increasing costs.
Where it has seen poor practice from firms, the regulator said it is addressing it directly with them, including taking action against specific firms where necessary.
The regulator said that “concerning” evidence of poor claims handling practices included a lack of oversight of outsourced services, resulting in poor customer outcomes, delays in settling claims and high complaint volumes.
It also found evidence of insufficient management information, resulting in failures to promptly identify and resolve claims handling issues.
Cash settlements were also being used in some cases without sufficient consideration of whether they are most suitable, the regulator said.
The FCA also highlighted high rejection rates for storm damage claims, saying only 32% of such claims made to a sample of firms in 2024 resulted in a payment.
The regulator is also providing evidence for coordinated action from Government, industry, and other regulators, as part of the Government’s motor taskforce, to help drive down the cost of motor premiums. This could help limit cost increases but it cannot prevent them, the FCA said.
It has also published an interim update of an ongoing premium finance market study investigating whether consumers receive fair value when choosing to pay for insurance in monthly instalments.
While premium finance allows customers to spread costs, making them affordable and providing flexibility, the regulator has found some firms earn much more money than it costs to provide the service. It will explore these concerns further in the next phase of the study.
The FCA said it will seek to tackle any issues it finds first through the Consumer Duty, publishing a final report 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.
“A well-functioning insurance market helps consumers navigate their financial lives and supports growth by building people’s resilience to financial and personal shocks.”
The FCA also said that evaluation of previous pricing reforms showed they are having the intended impact on the price gap between new and existing customers in both the motor and home markets.
This means its reforms were effective in curbing “price walking” where loyal customers were charged more at renewal, the regulator said.
Association of British Insurers (ABI) director general Hannah Gurga said: “The FCA’s findings confirm that record-breaking claims costs are behind recent increases in motor insurance premiums.
“They also demonstrate that many of these cost pressures – such as rising vehicle repair costs, part shortages and increased thefts – stem from issues beyond the industry’s direct control, making collaboration essential to find sustainable, long-term solutions.
“Ensuring a smooth and stress-free claims process is crucial for customers when going through what can already be incredibly difficult circumstances. Our members work hard to achieve this, but we will engage with them and the regulator to understand what improvements can be made in the claims handling journey, to ensure good outcomes for customers and to support trust and confidence in the industry.”
James Daley, managing director at Fairer Finance, said: “As things stand, consumers continue to struggle to understand the differences between insurance products.”
He added: “But even if consumers manage to buy a product that meets their needs, they still have no reliable way of knowing whether the insurer will treat them fairly at claims stage. And the FCA’s research shows that there is a wide difference in standards at this crucial moment.”
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