UK insurers have been urged to improve their claim handling skills after the UK’s financial watchdog found “concerning evidence” of poor practice in the motor insurance market.

The Financial Conduct Authority (FCA) said hikes in motor insurance premiums were down to how claims are handled by insurers, adding that “insufficient management information” was resulting in “failures” to promptly identify and resolve claims handling issues.

Higher prices for cars, parts, labour, energy and more complex cars and supply chains were among the reasons behind the rising cost of claims, the FCA said.

A significant rise in the cost of hiring vehicles, as well as the number and cost of theft claims and uninsured drivers, were also listed as reasons for the increase.

But the FCA also warned referral fees from credit hire firms and claims management companies were associated with slower claims processing and rising costs.

Motor insurance premium costs remain high

The average cost of car insurance premiums dropped seven per cent in the first three months of 2025 compared to 2024, decreasing from £635 to £539 according to the latest quarterly figures from the Association of British Insurers.

However, the cost of premiums remains high compared to two years ago, when the average annual policy cost was £478.

The rising cost of premiums saw Compare The Market increase its revenue by £100m in its latest quarterly results, as customers sought to switch providers.

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 stem from issues beyond the industry’s direct control, making collaboration essential to find sustainable, long-term solutions.”.