The motor insurance market is forecast to fall into the red next year as claims costs accelerate faster than premiums.

The outlook for insurers is expected to deteriorate in 2026, after a profitable 2024 and breaking even this year, largely because of inflationary headwinds and falling premiums, according to the latest analysis by EY, the “big four” professional services firm. Many insurers lowered prices as competition increased but margins are being squeezed by a combination of high repair costs and inflation pushing up claims.

The government is scrutinising consolidation and consumer costs in the motor insurance market after two big takeovers this year.

Last week ministers published the final report of a cross-government taskforce on motor insurance. Labour had vowed before the general election last year to tackle the “soaring cost” to consumers.

The taskforce, formed last October, is seeking to reduce the premiums paid by drivers, for example through tackling vehicle-related crime and encouraging new technologies to reduce costs. It believes the market is competitive, however.

Aviva acquired its struggling rival Direct Line for £3.7 billion, in a deal that was completed in July, creating Britain’s biggest motor insurer. Ageas, the Belgian insurance group, bought Esure from Bain Capital, the US private equity firm, for £1.3 billion, which completed in September.

Premiums are expected to have fallen 10 per cent this year, but will rise slightly next year, which EY forecasts will save motorists £39 overall over the two-year period.

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Despite the rise in rates the industry is expected to fall deeper into the red. For every £1 earned in consumer premiums in 2025, the sector is forecast to pay out £1.01 in claims and expenses, rising to £1.11 in 2026. That compares with 97p in 2024.

Dan Beard, UK insurance partner at EY, said: “The outlook has deteriorated further than expected over recent months due to the return of inflation and higher than expected premium rate reductions.

“Despite these challenges, the UK motor insurance industry is poised for significant transformation driven by shifting consumer preferences, in particular the continued rise of electric and hybrid vehicles.”

Research by the City analysts at Panmure Liberum has found that while the motor insurance price indices show prices continued to fall year-on-year in the third quarter, more recent monthly data suggests the declines are flattening out. “Conversations with market participants indicate that pricing needs to start to increase next year,” the broker said.

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“The recent consolidation of market share across the industry with the acquisitions of esure and Direct Line Group may lead to more rational pricing behaviour across the broader market.”

Panmure Liberum added that the conclusion from the government’s motor insurance taskforce that the industry was not “profiteering from past price increases” was “helpful in removing the regulatory overhang”.

Shares in Admiral, a member of the FTSE 100 and one of the biggest motor and general insurers in the UK, have fallen 7 per cent over the past six months.