Car insurance premiums reached a record high by the end of last year, rising at five times the rate of inflation.
The Association of British Insurers (ABI) Motor Premium Tracker – which measures the amount motorists actually pay rather than quotes – tells us where insurance premiums sat in 2016.
It found that the average price of private comprehensive insurance was £462. That’s up 4.9% on the previous quarter, adding an extra £22 to the average premium. The highest figure recorded before that was £443 in Q2 2012.
The average premium over the whole of 2016 is now 9.3% higher than the average premium over the whole of 2015.
Why are they increasing?
The rise in car insurance premiums can be pinned down to three reasons:
Rising repair costs
As cars are becoming more technologically advanced, they’re becoming more expensive to fix.
The average repair bill rose by 32% in the last three years to £1,678 in Q3 2016. The cost of getting parts is also becoming more expensive because of the weakening pound.
Tax
There has been three increases in Insurance Premium Tax since July 2015, and it will have doubled from 6%-12% when the latest increase comes into effect on 1 June this year.
The grapg below shows how IPT has risen in-line with private comprehensive car insurance since the beginning of 2014.
Source: ABI
More personal injury and whiplash claims
According to the ABI the latest bodily injury claims came to £10,674 in Q3 2016, a 2.3% increase on the same period in the previous year.
A Government crackdown may put a stop to that though. In November 2016, justice secretary Liz Truss proposed blocking whiplash compensation claims without medical evidence and a cap on minor injuries. Read more in: Whiplash claim crackdown could see car insurance costs fall.
Rob Cummings, ABI’s assistant director, head of motor and liability, said: “While we support the Government’s further reforms to tackle lower value whiplash costs, it must not give with one hand and take away with the other. The sudden decision to review the discount rate has the potential to turn a drama into a crisis, with a significant cut throwing fuel on the fire in terms of premiums.
Why premiums could rise further
The Ministry of Justice (MoJ) could be cutting what's known as the 'discount rate', leading to potential further premium increases.
The discount rate is a system used by courts to determine large personal injury damage payouts to take account of future return on investment. It’s been set at 2.5% since 2001.
There are concerns that the MoJ might adjust it using an outdated method which doesn’t assess how claimants actually invest their compensation.
The discount rate impacts claims that are often worth millions of pounds so a change of even half a percent could seriously impact the cost of claims, which will be passed on to motorists.
James Dalton, Director, General Insurance Policy, ABI, recently commented: "Given the enormity of the potential increase in claims costs, it is inevitable that a significant reduction in the discount rate will lead to an increase in motor and liability insurance premiums for everyone."
Beat the hikes!
You can reduce your costs by following the handy tips at 24 ways to cut your car insurance premiums or by getting a better deal at the loveMONEY car insurance centre.