Finally, some good news about car insurance!

by Neil Faulkner on 10 August 2011  |  4 comments
Tweet

Young drivers and homeowners have seen a fall in insurance costs and this looks set to continue.

Following two years of “unprecedented” increases in car insurance and home insurance prices, the AA reports a levelling in the past few months.

Average comprehensive car insurance prices across a score or more of insurers has more than doubled in just three years, according to current and historical data from the AA, now reaching £1,440. For third, party fire and theft policies the average price is up 65% to £1,510.*

Those who shop around might save significantly, however. The average shop-around premium for comprehensive cover is, the AA estimates, £920. That's £500 (35%) less than if you stay with your own insurer.

Rises are slowing and we've seen some falls

The AA's latest index shows that car insurance prices have moved up again. Those shopping around today might expect to pay 3.6% more than in the spring. However, things look good for a slowdown.

In a sign that prices may have peaked, drivers aged 17 to 22 saw shop-around premiums fall by 5.6%. Male drivers might now pay £2,870, down from above £3,000, and female £1,670.

Looking at home insurance, the average shop-around cost for combined buildings and contents insurance rose by 1.5% to £200 but, in a further sign that insurance prices are grinding to a halt, policies bought separately fell. Buildings insurance is down 0.6% to £145 and contents insurance 1.1% to £75.

The separate cost combined is about £20 per year higher than buying the two insurances together but, depending on your circumstances, separate policies can still be cheaper.

Simon Douglas, director of AA Insurance, highlighted that he had predicted last year that 2011 would see competitive pressure return to the market, helping to reduce the rate of increases. He added: “This is the smallest increase we have seen for some time, and I believe that over the rest of this year we will at last see premiums level off, despite the gloomier predictions of other market commentators.”

Here's why Douglas might be feeling positive

The insurance industry goes in cycles. For several years in a row it can make large, direct profits from premiums and in other years it makes small profits or even losses. Over most of the past 15 years, car insurers have, on average, made a loss on car insurance, paying more in costs and claims than they receive in premiums.

This is ok for insurers, up to a point. Insurers use car insurance as a way in to sell you other, more profitable products, such as home insurance, and they make further profits by investing premiums before claims are paid out. But when they are making significant and sustained losses it means our insurance is probably cheap, on average.

Right now, though, at least one insurer appears to be making a profit of about 4% on car insurance, home insurance and other insurances (but not long-term insurances such as life insurance, which is accounted for differently, and where losses are currently so huge due to cheap premiums that this makes it a good time to compare life insurance prices).

4% might not sound like much profit, but it is a huge amount for the insurance industry due to its cross-selling and investments. This insurer probably has no financial pressure to increase prices for the time being.

Since that insurer is Aviva, the largest in the UK, other insurers will be under great pressure resist price increases too, or else they will become less competitive to this insurer, and it will gain further ground at their expense. It is also likely that other insurers are at the same point in the cycle, because that is usually the case. This means they are also in profit and therefore have little pressure to raise prices.

It's nice to have some good news on insurance prices.

*If you're wondering why the average cost of a TPFT policy is higher than comprehensive – well observed. The reason is that insurers often find that, statistically, those who buy third party cover are less careful and have more accidents, particularly when their cars are nearly worthless and perhaps even more dangerous. That's why you should always compare comprehensive prices and not just third party ones, because sometimes anomalies make the former, better cover cheaper for the same person and car!

More: Compare car insurance and home insurance policies | How pregnancy and maternity leave affect your mortgage | The region with the worst drivers!