Direct Line becomes latest to warn over hit from rising cost of claims
18 July 2022, 09:34
The insurer said the cost of motor claims was now running at around 10% this year.
Direct Line has seen its shares plummet as it became the latest insurer to warn over profitability as soaring prices of car parts, repairs and motors pushes up the cost of claims.
The group said the cost of motor claims was now running at around 10% this year, which is higher than it expected and lagging behind increases in premiums.
This is set to leave its combined operating ratio — a key measure of profitability for insurers showing costs and claims as a proportion of premiums — at between 96% and 98%.
It marks a downgrade on the 93% to 95% it had previously guided for, sending shares in Direct Line tumbling a further 14% in trading on Monday morning.
Shares in the group had already come under pressure last week when rival Sabre warned over profitability due to claims cost inflation, sending stocks across the sector tumbling into the red.
Admiral dropped another 9% on Monday after Direct Line’s alert, with Sabre dropping a further 4% after shedding nearly 40% last Thursday.
Direct Line said it was cutting costs this year and next under existing plans to save costs, which should help offset the hit, while it is also raising prices.
The group further announced it would shelve the planned second half of its £100 million share buyback programme, although it said it was “confident in the sustainability of its regular dividends”.
Penny James, chief executive of Direct Line, said: “Today’s trading update follows a period of heightened volatility across the UK motor insurance market, in which we have seen claims inflation in motor in the first half of 2022 spike above the levels assumed in our pricing.”
She added: “We have already taken actions including increasing prices and deploying new pricing capability to restore margins, which mean we expect our 2023 combined operating ratio will improve to around 95% and we reiterate our medium-term target range of 93-95%.”
It is aiming to slash costs this year to between £690 million and £700 million and to around £670 million in 2023 – a £76 million, or 15%, drop in “controllable” expenses from 2021 to 2023, according to the group.
Direct Line said it had “no specific proposals at this time in terms of jobs” as part of the cost-cutting plans.
It is instead hoping to make savings by looking at leasing or selling off some space at its Bromley head office, further switching its operations online to save costs of communicating via paper, as well as by turning off old IT systems which have been running alongside side systems.
