There are two main factors that lead to a rise in motor insurance premiums. One factor will include external cost pressures, but there is an internal issue such as how some insurers handle claims.
The FCA recently released data and analysis that shows 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 significant 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. This does not include the number of claims or the proliferation of professional fraudsters and ‘crash for cash’ scams. The industry has made good strides in tackling this, but professional fraudsters still persist.
While it saw some good practice in the home and travel sector, the FCA also uncovered evidence of poor claims handling practices, including:
- Lack of oversight of outsourced services, resulting in poor customer outcomes, delays in settling claims and high complaint volumes;
- Lack of robust processes to deal with referral fees from credit hire firms and claims management companies (CMC) leading to slower claims processing and increasing costs.
- Insufficient management information resulting in failures to promptly identify and resolve claims handling issues and delays;
- High rejection rates for storm damage claims (only 32% of storm damage claims made to our sample of firms in 2024 resulted in a payment); and
- Cash settlements being used without sufficient consideration of whether they are most suitable.
To be fair, this does not imply that all firms are failing: where it has seen poor practice from firms, the regulator is addressing it directly, including taking action against specific firms where necessary.
The FCA is also providing the evidence needed 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, due to the proliferation of professional and organised fraudsters, it cannot prevent them.
Premium Finance – an update
Also published recently was an interim update of the ongoing premium finance market study investigating whether consumers receive fair value when choosing to pay for insurance in monthly instalments – see MS24/2.2 Premium Finance Market Study Update Paper, July 2025.
Motor insurance is compulsory – it is a legal requirement to insure your vehicle for road use – and the premiums are high. Some customers can and do pay for them as a single payment but may customers, due to the high cost, prefer to pay monthly.
While premium finance allows customers to spread costs, making them affordable and providing flexibility, the regulator has found that some firms earn more money from interest charges, than it costs to provide it the insurance. Firms will make money from premium finance – that is expected – but firms should consider this finding as a warning and review their quoted charges to ensure the charges and profits earned represent ‘fair value’ to the customer.
The FCA will explore these concerns further in the next phase of the study and will seek to tackle any issues it finds first through the Consumer Duty, publishing a final report by the end of 2025.
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