Why are car insurance costs increasing?

Car bumper

The growth of compensation culture, rising fraud and increasingly savvy consumers have all led to a sharp rise in car insurance premiums, according to the latest premium index from the AA.

The frequency of personal injury claims and settlement costs have hit car insurers hard, with average claim costs outstripping premium income by up to 20%, it says.

Simon Douglas, director of AA Insurance, points the finger of blame at personal injury lawyers, whose marketing messages have led to compensation claims becoming “increasingly embedded in British culture”.

“Many people seem willing to pursue claims for even minor injuries, such as mild whiplash pain that in the past they wouldn’t have bothered claiming for,” he adds.

The index shows car cover costs have risen by more than 7% over the last three months of 2009. 

Other factors influencing this rise in premiums include the recent cold spell, which resulted in 30% more claims than normal, and the steadily rising cost of accident damage.

Fraud rates are also a concern. Douglas says: “Insurance fraud is costing the industry around £2 billion a year - which amounts to £44 on every household’s insurance budget.”

He adds: “The situation is clearly unsustainable and the inevitable result is that premiums increase, despite the extremely competitive nature of the market.”

Drivers are urged to ensure they review their car insurance policy on an annual basis, as new customers tend to be offered better deals than existing ones. Motorists waste £141 each by sticking with their existing insurer rather than shopping around for a new policy, according to moneysupermarket.com.

“Consumers who automatically accept their renewal premiums for home and car insurance this year could end up paying a high price for their loyalty,” explains Lee Griffin, business development director at gocompare.com.

“Every motorist and homeowner should be challenging their insurer by comparing their renewal quote against those offered by the competition. And if their quote doesn’t measure up they should vote with their feet and switch.”

However, the AA’s index shows that premiums offered on price comparison websites are actually increasing at a significantly faster rate than the underlying trend.

This, says Douglas, is down to an increasing number of people regularly switching deals: “Insurers are well aware of this and are becoming less likely to offer generous introductory rates because there’s little chance they’ll retain the customer at a realistic renewal premium.”