Shares in home, motor and travel insurer Direct Line Group (DLG) drifted 3% lower to 280p following a third quarter trading update which showed premium growth below expectations.
For the nine months to the end of September total premiums grew by 0.7%, missing the consensus forecast of 4.5% due in part to motor premiums being hit by increased competition ahead of the FCA pricing reforms being introduced in January. In contrast to other market participants, DLG is pricing for claims inflation.
TOXIC MIX
A combination of a sharp drop in motor insurance premiums and record-high claims inflation has created a toxic backdrop for the sector.
Lower levels of traffic on the roads as a result of Covid-19 have resulted in a 15% decline in UK motor insurance premiums since March 2020, according to CPI data provided by the Office for National Statistics (ONS).
Meanwhile, claims inflation has been running at record levels of 7-8% in recent years due to the rising costs of spare parts.
A larger number of cars are now equipped with more sophisticated components including LED headlamps and bumpers fitted with parking sensors.
These are more expensive to replace once damaged and require a more skilled workforce to install and repair, with the increased cost inflation having a negative impact on insurers' margins.
POTENTIAL GAME CHANGER
However, by owning its own repair garage network, DLG Auto Services, the firm has been able to keep underlying claims inflation at around 3-5% in recent years, giving it a competitive advantage over its peers.
Owning its own network also allows it to offer quick repair times due to its large and bespoke repair centres. Currently 55% of work goes through DLG Auto Services, but the longer-term aim is for 70% of repairs to go through these centres.
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