Car insurers are paying out a total of £200m in compensation to around 270,000 motorists after the industry regulator found widespread underpayments to drivers whose vehicles had been stolen or written off.
The Financial Conduct Authority (FCA) said its review uncovered evidence that insurers had systematically undervalued claims. In some cases, firms automatically deducted money for supposed pre-existing damage — even when cars had been properly maintained. The practice, which often penalised careful drivers, meant thousands of motorists received less than the true value of their vehicles and struggled to afford a like-for-like replacement.
Insurers Told to Change Practices
The FCA first raised concerns in 2023, ordering Direct Line to revisit five years of claims and issue refunds where appropriate. In August this year, Admiral also confirmed it had set aside £50m to cover potential repayments.
Following the review, insurers across the market have now been instructed to change their claims processes. So far, £129m has been returned to nearly 150,000 customers, with the rest expected to be distributed in the coming months.
Sarah Pritchard, deputy chief executive of the FCA, said the intervention showed the regulator would act where consumers were not receiving fair treatment.
“We’ll step in when consumers aren’t getting fair value – and we are pleased to see that the practices which led to some unfair payouts have already changed,” she said. “This means thousands of motorists are getting back what their car was really worth.”
She added that customers do not need to take any action, stressing: “If you’re owed compensation, your insurer will contact you, or will have already done so.”
Valuing Cars in a Volatile Market
Experts say one reason behind the problem is the sharp fluctuations in used car prices in recent years. Supply chain shortages, high demand for secondhand vehicles, and delays in repairs have all made it harder for insurers to calculate accurate settlement values.
Cormac Bradley, senior actuarial director at consultancy Broadstone, said:
“There’s also a higher number of cash settlements as vehicle repairs are hampered by supply chain pressures and labour shortages. Insurers need to be confident that they reflect the uncertainty appropriately in the customer’s favour to avoid under-compensation.
This is no small challenge at a time of volatile car prices, so it is pleasing that the regulator and the motor insurance industry have reached a resolution which will enable fair, historic compensation and certainty moving forward.”
Industry Response
The Association of British Insurers (ABI) acknowledged the difficulties faced by insurers but said members had acted to improve settlement processes.
An ABI spokesperson said:
“Insurers work hard to deliver the best possible service for their customers. There has been a lot of volatility in the secondhand car market in recent years which created challenges for insurers when trying to set valuations. Our members have made changes to their settlement approach and taken the necessary steps to support customers.”
What Drivers Should Know
The FCA emphasised that motorists entitled to repayments do not need to make a claim themselves. Compensation will be arranged directly by insurers, who are responsible for contacting affected policyholders.
The regulator added that the case should serve as a reminder to all financial firms to prioritise fairness and transparency when handling customer claims.
For drivers, the advice is clear: if you suspect your insurance payout is too low, it is worth challenging the valuation and requesting evidence from the insurer.
