Car insurance hikes inevitable thanks to government blunders, says AA

• ·        Small average premium increase over first quarter, but sharper increases to come, according to AA British Insurance Premium Index
• ·        Those aged 40-59 see their premiums fall
• ·        ‘Discount Rate’ cut and IPT rise will pile on premium misery

A sharp acceleration in car insurance premiums last year would have stalled over the first quarter of 2017 but for a shock Government change to the so-called ‘discount rate’ or ‘Ogden Rate’, which governs the amount of injury compensation that is paid to victims of car crashes.

The ruling means that injury pay-outs paid by insurance companies will significantly increase which, in turn, will drive higher premiums especially for those who already pay the most for their insurance because of their greater likelihood of being involved in a car collision resulting in injuries – the youngest and oldest drivers.

According to the AA’s latest British Insurance Premium Index ⁽¹⁾ for the first three months of 2017, the average quoted Shoparound premium for a typical annual comprehensive car insurance policy rose by 0.7% or £4.25, to £640.82 while those aged between 40 and 59 actually saw their premiums fall. 

Over 12 months, the average increase is 12.9%, or £73.42, while quotes for Third Party, Fire & Theft cover (mainly bought by young drivers with older cars) have risen by an eye-watering 21.6%. 

‘Astonishing’ discount rate reduction

Michael Lloyd, the AA’s director of insurance, points out that if it were not for the discount rate change, premiums would have remained stable or even fallen.

“The Discount Rate is the percentage sum applied to injury compensation payments, that reflects the interest that could be earned by a claimant, if they were to invest their pay-out.  

“It has been fixed at plus 2.5% since 2001 but with effect from 20^th March, it was slashed to minus 0.75%. 

“So, where injury compensation payments used to account for the assumed future investment return of 2.5% following this decision, claimants are being paid more money to allow for the negative investment rate now imposed.

“It has had an immediate effect on car insurance premiums because injuries already claimed for, but not yet paid, are affected by the rate change as well as new claims.

“It was an astonishing and unrealistic decision that didn’t take account of where claimants are most likely to save their money.  They are not going to put their money into Government securities, on which the discount rate is calculated, which have a negative interest return.”

Because of the way the discount rate is applied, young drivers will take the brunt.  One analysis** suggests that drivers aged 17-22 – who are most likely to be in a collision that injures others – could see their premiums rise by up to £1,000 while on average premiums are expected to rise by around £50.”

Insurance premium tax

This comes on top of both continually rising car repair costs and the doubling of Insurance Premium Tax ⁽²⁾ in just two years, to 12% (from 1^st June), both of which are contributing to upward premium pressure.

Recent research ⁽³⁾ by the AA shows that nearly half of families with young drivers would resort to illegal attempts to attract low premiums such as ‘fronting’, where a youngster listed by an adult as a ‘named’ – or occasional – driver, when in reality the young person drives the car most or all of the time.

Even the Financial Ombudsman has recognised that this is an issue, publishing a case study earlier this year to warn of the possible consequences of insurers withdrawing cover and not meeting a claim, because of fronting.

Whiplash injury claims

The last sustained period of car insurance cost increases was in 2010 when the average quoted Shoparound premium increased by just over 40% in 12 months, largely thanks to fast rising whiplash injury claims.  

Premiums then dropped on the expectation that new legislation to curb the activities of claims management companies would slow the number of claims but this had only limited success.  The Ministry of Justice has just announced that it is shelving further reforms that had potential to further reduce the still-unacceptable flow of fraudulent claims.

“It means that the whiplash gravy train has the green light again, which is not good news for car insurance premiums,” says Lloyd. 

“The Index suggests that the first quarter is the calm before the storm.  Although I don’t expect to see premiums rise as sharply as they did over 2010/11, there’s no doubt that they will quickly climb again unless further IPT increases are curbed and the discount rate is reviewed.”

Car insurance winners and losers

Regional data

Four regions saw premiums fall over the quarter, the largest drop being Border & Tyne Tees which saw average quoted premium fall by 1.3%.   The highest rise was in Northern Ireland where the average quoted Shoparound premium jumped by 5.8%.  On the UK mainland, the biggest rise was for the South, at 1.9%.  Despite a rise in premium of 1.5%, Scotland remains by some measure the cheapest region to insure a car with an average quoted premium of £469.55.  The North-West is the costliest region to insure a car, at an average of ££906.31

Premiums by age and gender

Although male and female drivers can expect to be quoted the same premium if all other elements of the quote are identical (car, mileage, occupation, address, driving record); men nevertheless can expect on average to be quoted a higher Shoparound premium than women.  According to this data, 17-22 year old men can expect to pay just over £300 more than women in the same age group.  Drivers aged 17-22 pay the highest premiums and on average can expect to be quoted £1,476.61.  Two age groups saw their premiums fall over the quarter: age 40-49 by 1.0% to £500.75 and those aged 50-59 by 1.9% to £443.22.

Premium movements since 2013

NOTES FOR EDITORS

NOTES FOR EDITORS

(1)  The AA’s British Insurance Premium Index has been tracking average quoted premiums since 1994. The ‘Shoparound’ quoted premium is an aggregation of new quotes from direct, broker and price comparison site sources and is an average of the five cheapest quotes for each ‘customer’ in a nationwide basket of risks.

(2)  Insurance Premium Tax rose from 6% to 9.5% from 1 November 2015.  It rose to 10% from 1 September 2016 and will rise to 12% from 1 June 2017.

(3)  Populus conducted the research among 19,317 AA members between 15-22 November 2016.  Populus is a member of the British Polling Council and abides by its rules.

The figures provided are a combined analysis of the quotes from both the direct/broker and price comparison site markets, using a basket of risks representative of the car insurance-buying public

The latest British Insurance Premium Index will shortly be on the AA website here http://www.theaa.com/newsroom/insurance/bipi/british-insurance-premium-index.html