Competition in the car insurance market has left insurers at risk of running out of claim reserves in just two years time and could result in higher car insurance premiums, a new report has warned.
A company's reserve is money that has been held back in previous yearsto enable the insurer to meet future claims. However, competition in the market from price comparison websites means that many car insurers are using their reserves to fund cheap premiums - a practice that cannot continue for much longer.
The report, from EMB Consultancy, reveals that reserves are currently at their lowest level since 2001 and warns that they could dry up altogether if car insurers continue to use the money to subsidise policies.
The report shows that insurers have released £1 billion of reserves over the past 12 months in order to combat the rising competition from comparison sites. This has allowed some companies to subsidise their motor account by as much as 30%.
Naeem Ali, a senior consultant at EMB, believes that, in the short-term, consumers can reap the rewards from this practice.
But he warns: "The motoring public is benefiting from this competition, but the current position cannot continue indefinitely. Price rises are inevitable."
This supports figures from the latest AA’s British Insurance Premium Index, which expected further prices hikes for car insurance customers.
Peter Gerrard, head of insurance research at Moneysupermarket.com, says: "With so much competition out there, insurers are using their reserves to maintain high levels of incentives for customers. With internet customers being more savvy, insurers are trying to lure more customers with better discounts."
Gerrard also feels price rises are around the corner: "I can definitely see premiums going up over the next few years. It makes sense, as companies were hit by the floods last year. I'm not saying that motorists are paying for it, but insurers will be looking for ways to recoup some of their profits."
He adds that, as there is little very profit to be made from car insurance in the first year, firms are relying on customers sticking around for a further 12 months, to clawback some of their profits.
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