Unprecedented premium increases hit drivers hard

Car insurance premiums are rising faster than at any time over the past 15 years, according to the latest AA British Insurance Premium Index.

The Index, which tracks the quarterly movement of car and home insurance quotes, recorded a 5.6 per cent jump for comprehensive car insurance, over the three months ending 30th September.

This is the biggest single quarterly jump since the Index started in 1994. The index has also shown the greatest-ever annual increase with 14 per cent added to the average comprehensive premium.

The Index analyses quotes from over 90 insurance companies, brokers and schemes for 1,000 ‘customers' nationwide. The average quoted premium for an annual comprehensive car insurance policy now stands at over £821, compared to £778 in July 2009 and £721 in October 2008.

"Most drivers will be seeing sharp increases when they renew their annual insurance premiums," says Simon Douglas, director of AA Insurance. "The Index suggests that 89 per cent of insurers have increased their premiums by more than £5 over the past quarter. Only 2.5 per cent reduced them."

The Shoparound index, which is an average of the cheapest three quotes for each ‘customer' in the Index and closer to the price customers would pay after shopping around, showed a slightly lower increase of 4.8 per cent, to just under £552.

Young drivers hardest hit: But it's young drivers who appear to have taken the brunt of the rises. Third party, fire & theft (TPFT) premiums typically bought by young drivers (on a like-for-like basis, TPFT is cheaper than comprehensive cover), rocketed by 9.3 per cent this quarter (17.6 per cent over the year), to an average quoted premium of £1,059. The Shoparound index similarly rose by 8.3 per cent (20.7 per cent over the year) to £725.

Douglas described the premium increases over the past as ‘unprecedented',

"Last year one industry commentator said that premiums must increase by at least 20 per cent if the car insurance sector was to return to profitability. At the time I thought this unlikely but it looks as if that prophecy might be fulfilled.

"Car insurers are facing fast rising costs, reserves for paying claims are depleted and investment income has fallen, largely because of the recession.

"I estimate that across the industry, up to £110 is being paid in claims for every £100 taken in premiums - a situation that is clearly unsustainable. "Despite motor insurance being one of the most competitive markets in the UK, insurers have little choice but to put premiums up."

Douglas says that the greatest pressure from rising premiums is coming from personal injury claims and fraud, while more people seem to be risking driving without insurance despite the increasing success of police in stopping them and confiscating uninsured cars.

Theft of upmarket cars - especially by robbery and burglary of keys - has also increased sharply with AA's own claims up 15 per cent over six months. "Last year, 20,000 cars worth at least £600 million disappeared in this way and that number appears to be rising fast," he says.

Douglas is also concerned that young drivers appear to be faring worst in the rate increases.

"I'm worried that premiums are fast becoming unaffordable for young drivers and that might encourage them to risk taking to the road without insurance," he says.

"Many insurers are withdrawing TPFT cover and more than half won't insure under 20-year-olds. In addition, young drivers, who shop around on the internet for their cover, are least likely to remain with their first provider so companies are less likely to offer introductory discounts. With some cheaper insurers moving out of this market, the average quoted premium has increased."