There’s been a lot of talk about car insurance premium hikes in both the national and regional news of late. If you’re a driver, you’ve probably witnessed this first-hand as your policy renewal letters arrive each year.
They’re no small hikes, either. Recent research by the Consumer Intelligence agency revealed that the cost of car insurance is increasing five times faster than inflation, at around 14.6% per year (compared to 2.9% for inflation, as measured in August 2017). Indeed, average annual premiums have now passed the £750 mark.
But why have drivers across the UK been hit with such significant premium price rises in the past few years – and especially in the last 12 months?
A perfect storm
Heath Alexander-Bew, Director of Personal Lines at Alan Boswell Group, has been tracking the car insurance market closely during his career. Over the past three years in particular, he has seen many factors come into play.
For starters, there’s increased claims costs. “With so much advanced technology going into today’s cars, they are becoming far more expensive to fix and replace, which is having a knock-on effect on motor insurance premiums,” Heath explains. Not only this, but the current exchange rate is ramping up the cost of importing parts into the UK.
Read more: The insurance claims process explained
“Arguably, insurers are no longer making the same returns when investing premiums between claim payouts because interest rates are low. This lost income has to be replaced somehow, and it’s likely to be through increased premiums,” he speculates.
Then there’s the government’s Insurance Premium Tax (IPT). Designed to raise revenue from the insurance sector, which was previously deemed to be under-taxed, IPT has been repeatedly increased by the government since it was introduced in 1994. Back then the rate was just 2.5%, but now it stands at 12%.
“The most recent increase of 2%, which came into effect at the start of June 2017, added approximately £8 to the average car insurance premium for our clients,” says Heath. “Unfortunately, I can only see this rate continuing to rise in future budget announcements.”
And this isn’t the only government ruling that has impacted on the cost of car insurance. In March 2017, the Ministry of Justice made a dramatic cut to the Ogden Rate (also known as the Discount Rate). This figure is used to calculate how much insurance companies should pay out to customers who have suffered serious personal injuries.
Lump-sum compensation payments are adjusted according to the interest that claimants could expect to earn by investing it. The rate by which payments are adjusted is based on the lowest-risk investments. This is because claimants must be treated as ‘risk-averse investors’, because they may be financially dependent on the payout for a long period of time – if not their whole life.
The percentage rate was a 2.5% reduction in the claim, to account for interest. That meant an insurance company would need to pay out £1,950 to cover a £2,000 loss (i.e. reducing a £2000 claim by 2.5%) The remaining 2.5% would be made up by any investments made by the claimant. But, as of March, with bank interest rates still at a record low, the rate dropped to -0.75%. What that means is the insurance company would have to pay out £2,015 in the same scenario.
How has this resulted in higher insurance premiums? Well, insurance companies need to cover these increased costs. “The Ogden Rate change has seen motor premiums rise by around £75 on average, with younger and older drivers finding themselves hit the hardest. That’s because they are considered to be more of an insurance risk,” Heath explains.
Read more: Discount Rate change 2017
One to watch
Another potential variable that Heath has been monitoring is the fallout from an unprecedented court case in Slovenia.
It was a long and complex case, which began with farm-worker Damijan Vnuk receiving injuries when he was knocked off a ladder by a reversing tractor and trailer. This ended with a European Court of Justice ruling that all vehicles must be insured for the ‘normal function of that vehicle’. And that surely invites the possibility that motorised vehicles being used solely on private land will soon have to be insured – even in the UK.
“We’re not sure exactly how this is going to affect the UK yet. A final decision is expected anytime now,” says Heath. “It could have an impact on insurance premiums, and it could mean that all off-road vehicle drivers will need to have third-party liability cover going forward. The Motorsport Industry Association has indicated that such a result could signal the end of motorsport in this country.”
Taking control of the situation
Thankfully, there are also some positive developments in the car insurance market, which are bringing hope to the future of premium prices.
“For example, personal profiling is being used more by insurers,” says Heath. “By accessing applicant information from various databases, such as their age, address, credit score, claims history etc., insurers are able to calculate suitable premiums. And the better the profile, the more competitive the premium.
“The Ogden Rate is also being reviewed and the levels may change, so the rate of compensation may be reduced. We’re keeping a close eye on how that develops.”
In the longer term, driverless cars may also help to improve motor insurance costs. It’s hoped they have the potential to significantly reduce the number of road traffic accidents – and, therefore, claims.
But what steps can motorists themselves take in order to bring their car insurance premiums under control? “If you’re looking for cheap motor insurance, then your choice of vehicle will play a key part in the premium you pay. A Ford Fiesta, for instance, is far cheaper to insure than a Porsche 911,” says Heath.
“Telematics [black box] technology is also quite common in the young driver market. It monitors things like acceleration, braking and cornering and then rewards good drivers accordingly through reductions in their premiums,” he adds.
“Of course, as an independent insurance broker, we’re always able to provide tailored advice on how to keep your premiums down. And we would review this regularly because, as is clear from the above, the market can – and does – change quite radically from year to year!”