The impact of inflation on the UK insurance market in 2025
The UK economy has struggled with inflation over the last few years. Headline price rises have eased from the double-digit peaks of 2022, but they remain well above the Bank of England’s long-term target, with the Consumer Prices Index (CPI) up 3.6% in the 12 months to October 20
By Alan Boswell Group
This headline figure only hints at the deeper pressures in the insurance sector. In many classes, the true cost of settling claims has risen far faster than CPI, driven by higher material costs, labour shortages, supply-chain disruptions, extreme weather, cybercrime, and what’s known as “social inflation”.
This article looks at how these factors have shaped the UK insurance market in 2025 and what they mean for insurers, brokers, and policyholders.
What is the direct impact? Claims inflation and rising premiums
Increased claims costs
Inflation pushes up the cost of components needed to settle a claim: building materials, car parts, medical treatment, machinery, and the labour to repair or replace them. When these costs rise faster than CPI, insurers face claims inflation.
Statistics from the Association of British Insurers (ABI) highlight the scale of the issue. Between 2019 and 2023, motor insurance claims jumped 34% – much higher than the 21% spike in general inflation. In 2024, vehicle insurers paid out an eye-watering £11.7 billion in claims, with the average private motor claim up 13% at £4,900. Property insurance claims didn’t fare any better. In the third quarter of 2024, average home insurance claim costs rose 33% when compared with the previous year.
If the cost of claims rises faster than premiums, underwriting margins (profit after expenses and claims payments) shrink quickly, which is one reason why, in general, premiums have increased in recent years.
Higher repair costs
One of the strongest drivers of claims inflation is the rising cost of repairs across multiple sectors.
Property insurance has been hit hard by rising material prices. The prices of timber, steel, glass, plasterboard, and insulating materials have risen sharply since 2021. Skilled trades remain in short supply, pushing up labour costs and prolonging project completion times. There are may be additional costs, such as alternative accommodation for homeowners or tenants, as well as business interruption payouts for commercial customers. Higher costs mean that an increasing number of properties and businesses are at risk of underinsurance if the sum insured doesn’t keep pace with current rebuild or replacement costs.
In motor insurance, repairs have become more complex due to modern vehicles’ reliance on advanced technology, including Advanced Driver Assistance Systems (ADAS) sensors and other specialist components. These systems require specialist diagnostics and calibration, increasing both time and cost.
Electric vehicles (EVs) illustrate this trend clearly. Repairs often require manufacturer-specific parts and engineers who are trained in high-voltage systems. Damaged EV batteries require dedicated facilities where they can be quarantined to reduce the risk of fires spreading. Even minor collisions can cause expensive damage to battery housings, sensor arrays, or underfloor components, turning a small claim into a high-cost repair.
The combined effect across property, motor, and commercial insurance lines is a sustained rise in claims costs, which ultimately feeds into the premiums insurers set.
Rising premiums
As the cost of settling claims rises, premiums inevitably follow. Insurance relies on pooling risk, so the premiums collected must be sufficient to cover future claims. When inflation pushes up the price of materials, labour, and specialist services, the expected cost of each claim increases.
This will be reflected in the premiums insurers charge, enabling them to maintain the funds needed to settle claims. If not, some insurers could end up at risk of collapsing, and in this scenario, the premiums policyholders pay could become worthless if they can’t get a payout when they make a claim.
For businesses and individuals, it’s more important than ever to review cover regularly, check that sums insured are accurate, and work with a broker who can provide you with advice on the cover you need and negotiate with multiple insurers to find you the best policy for your risks.
The challenge of “social inflation”
Economic inflation is only part of the story. Insurers have increasingly faced the issue of “social inflation” – the rise in claims costs driven by legal, societal, and behavioural trends.
Social inflation stems from shifts in attitude, such as more frequent litigation, higher court awards, broader interpretations of liability, increased availability of litigation funding, and changing public attitudes towards corporate responsibility. Originally observed in the US, these trends are now becoming more prominent in Europe and the UK.
This is especially significant for liability policies: employers’ liability, public liability, product liability, professional indemnity, medical malpractice liability, and directors’ and officers’ (D&O) liability. Because claims in these classes can develop over many years, even subtle shifts in legal norms can dramatically increase the cost of claims.
Insurers must therefore set aside higher reserves, widen rating margins to account for uncertainty, and become more selective about whom they choose to insure. Policyholders may experience higher premiums or stricter policy terms as a result.
Other pressures in the insurance industry
It’s also important to note that the insurance industry is exposed to a range of external pressures that can affect premiums. These include supply chain disruption, climate change, and cyber risk.
Supply chain disruption
Global supply chains are still feeling the aftershocks of the COVID-19 pandemic, but geopolitical tensions and regional conflicts have compounded the pressures. The conflict in Ukraine, for example, continues to disrupt the flow of key commodities such as steel, timber, aluminium, and energy. Sanctions, fuel price volatility, and restricted trade routes have increased transportation costs and created unpredictable delays. Meanwhile, ongoing tensions in the Middle East, including attacks on container ships in the Red Sea, have forced vessels to divert thousands of miles around Africa, significantly lengthening delivery times and increasing freight costs.
Such instability directly affects insurance claims. Materials and specialist components not only cost more but also take longer to obtain, creating bottlenecks across construction, automotive repairs, and manufacturing. Even everyday items such as glazing, insulation, or ceramic tiles may be affected if their production relies on inputs from destabilised regions.
Delays also magnify the financial consequences of a loss. Projects can stall, timelines can slip, and machinery can stand idle while parts are sourced. Households and businesses may end up spending significant time in temporary accommodation.
Climate-related issues
In 2024, UK insurers paid over £4.1 billion in property claims by the third quarter of the year, with average claim values up by a third year-on-year.
In recent years, extreme weather incidents have become more frequent and severe in the UK. We’re now beginning to see its effects on the insurance market. Heavy rainfall has caused issues in areas that weren’t considered high-risk until recently. Effects have included flooding and water ingress to both domestic and commercial properties. Many of these issues result in claims that require costly remedial work.
Severe winter storms, such as the succession of named storms in 2023 to 2024, bring widespread wind damage, including torn roofs, fallen trees, smashed glazing, and structural harm to homes and commercial buildings. Secondary effects, such as water ingress following roof failure or prolonged power outages, often exacerbate the initial damage, increasing the overall cost and duration of claims.
Increasing heatwaves are also creating new patterns of loss. Britain’s housing stock, much of it built decades ago, is not designed for prolonged high temperatures. Problems due to heat include subsidence, warped roofing, and electrical system failure.
Intense heat can cause subsidence in properties built on shrinkable clay soils, warping of roofing materials and timber structures, and failures in older electrical systems. These environmental pressures have forced insurers to invest heavily in new ways to model risk. These include sophisticated flood mapping and predictive systems for subsidence risk.
Cyber risk
Cyber risk continues to evolve rapidly, with attacks becoming increasingly sophisticated, targeted, and financially damaging. According to the Government’s Cyber Security Breaches Survey 2025, 43% of UK businesses experienced some form of cyber breach or attack during the previous 12 months. Despite this, many firms still operate without dedicated cyber insurance. Some assume that their commercial insurance policies will cover them. In reality, these policies almost always exclude cyber-related losses.
A successful cyber-attack can trigger a cascade of operational, financial, and regulatory problems. Ransomware can freeze entire networks, halt production or disable customer-facing systems, while data breaches can expose sensitive information and prompt investigations from regulators.
The fallout often extends far beyond the initial incident. It can result in substantial follow-on costs, ranging from IT forensics and system rebuilds to crisis communications, legal advice, customer credit-monitoring services, and lost revenue due to downtime. For SMEs with smaller financial reserves, the impact can be particularly severe.
Given the scale of these potential losses, dedicated cyber insurance has moved from being a niche add-on to a core protection. Good-quality cyber cover can include cyber training and risk assessment, incident-response support, ransom negotiation, system recovery, legal advice, compensation for lost revenue, and liability protection if clients or partners are affected.
The role of index-linking
Many policies use index-linking to automatically adjust insured sums each year in line with recognised inflation indices. This helps ensure that cover broadly keeps pace with rising repair and rebuild costs. Index-linking is particularly valuable during periods of rapid or unpredictable inflation, when prices for materials or labour can change significantly.
However, index-linking is only as accurate as the starting value. If a building, piece of machinery, or stock was undervalued when the policy began, index-linking simply applies an annual uplift to an already inaccurate figure. In addition, some cost categories, such as specialist construction materials, skilled labour in short supply, or complex technological components, may rise faster than the general indices insurers use, meaning index-linked cover may still fall short at the point of claim.
For this reason, regular valuations and reviews remain essential. Index-linking helps, but it cannot compensate for outdated or incomplete assessments of the true cost to rebuild property, replace equipment, or sustain operations after a major loss.
Navigating insurance inflation and getting expert advice
As we’ve seen, inflation in the UK insurance market is a complex challenge.
Working with an experienced independent insurance broker is one of the most effective ways to ensure your policy will adequately cover your risks. A broker can identify areas of exposure, negotiate with multiple insurers, and ensure your cover genuinely reflects your risk profile. To find out more about how using an insurance broker could benefit you, speak to our team or send us an email.
Make an enquiry – general and locations
Related guides and insights
What can you do to reduce the impact of inflation on your personal finances?
What is inflation and how does it impact personal finances? In this guide we take a look at the current situation and ways to reduce the impact of inflation on your personal finances.
Claims cost inflation – what it is and what can businesses do about it?
While inflation is riding high, claims cost inflation – the amount it costs an insurer to settle a claim – is even higher. In this article, we explain how to protect your business from its effects.