Why are your car insurance premiums rising?

The rising cost of petrol constantly hits the headlines, but one major household expense that is rising with far less attention is car insurance.

The average premium rose by 15% in 2011 to £971, according to the AA. Over the past decade, premiums have increased by 110%, making motoring insurance a huge household expense.

But why have premiums shot up? Are we all driving like maniacs and claiming for written off supercars?

Personal injury

"By far the biggest factor in the rise in insurance premiums over the past 10 years is the cost of personal injury claims," says Simon Douglas, insurance director at the AA.

A decade ago, the largest part of the payouts was for car repairs but now around 50% of car insurance claims are for personal injuries.

The number of people claiming to have been hurt or to have suffered whiplash in car accidents rose by 18% from 2010 to 2011 - the biggest rise ever recorded, according to the annual report from the Institute and Faculty of Actuaries. It also found payouts were up by 9%.

Part of the problem is the explosion of no-win, no-fee lawyers. "Some motorists involved in minor accidents are being approached by personal injury firms to put in claims for injuries they wouldn’t have considered on their own," says Scott Kelly, head of motor at gocompare.com.

This is backed up by the findings of the Institute and Faculty of Actuaries report, which show the highest number of personal injuries claims are made by people living in areas that have the most claims companies.

"The correlation between claims management office locations and the 'hotspots' for bodily injury claims suggests the two are linked. We expect to see legislation soon that will affect the way these companies do business," says David Brown, chairman of the Institute and Faculty of Actuaries.

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Repair Costs

The next biggest reason for rising premiums is the increasing cost of repairing cars. Advances in technology mean that repairing minor damage to a car is getting more expensive.

"Ten years ago a broken headlamp just needed a new bulb and glass, but these days the headlamp is probably part of a sealed panel that will all have to be completely replaced," says Douglas.

Industry Quirk

But it isn’t just our choice of car and a growing claim culture that is to blame for the soaring cost of car insurance. The Office of Fair Trading (OFT) believes one cause of rising premiums is the insurers themselves.

In May, the OFT announced that it was referring the car insurance industry to the Competition Commission, saying that actions by insurers inflating costs for competitors may be increasing premiums.

Following an accident, it is the insurer for the person who is at fault that is responsible for car hire and repair charges, but it has no control over the costs as the insurer of the not-at-fault driver arranges replacement cars and repairs.

As a result, it can take advantage of the other insurer’s lack of control and get more expensive repairs and car hire.

A prime example of how this can vastly increase the cost of claims is the use of credit hire. This is where the victim is provided with a replacement car while the running so-called 'crash for cash' scams,” says Kelly.

These people intentionally cause minor accidents so they can claim for personal injuries. The Association of British Insurers estimates this costs the industry £2 billion a year, adding £44 to the cost of every car insurance policy.

On the upside

But the tide may be turning. For the past six months, premiums have been falling, albeit marginally, because of market competition. "It's a very competitive market and a minor price rise will lead to a large drop in sales volume," says Douglas.

In 2009, insurers were paying out £1.23 in claims for every £1 they received in premiums. As a result, they increased prices in order to decrease their exposure to these losses as they would then have fewer customers.

But when one firm raised its premiums, everyone else followed suit so they wouldn’t be left insuring the majority at a loss-making rate. But following several years of premium rises, insurers have managed to reduce their losses so prices are falling as they look to increase their volume.

But with the UK claims culture still developing and new laws coming in next year that will prevent insurers basing premiums on customers' gender, motor insurance premiums could start rising again soon.