Car insurance set to rise by 14% this year

A record rise in the cost of car insurance spells terrible news for motorists...

One unexpected side effect of the banks nearly going bust is that premiums for car insurance are going through the roof. The chain of events goes something like this:

• banks lend recklessly and lose money;
• this leads to a credit crunch;
• financial markets collapse;
• investment returns plunge;
• governments bail out banks;
• an economic downturn ensues;
• crime levels rise;
• fraudulent claims go up; and
• car insurance gets more expensive!

More fraud means higher premiums

In the previous recession, I worked in the legal department of an insurance company. During this downturn, we saw a huge increase in the number of fraudulent or exaggerated claims. Accordingly, in January, I predicted that financial fraud would rise this year.

In tough times, desperate people resort to desperate measures. Hence, vehicle theft (particularly upmarket cars) is rising strongly. In addition, the number and cost of personal-injury claims keep increasing. The cost of fraud -- and dealing with accidents involving two million uninsured drivers -- adds roughly £44 to the typical car insurance premium.

Furthermore, thanks to collapsing investment returns, motor insurers are paying out roughly £110 for every £100 of premiums collected. Put together, these have led to the steepest rise in car insurance premiums for 15 years, according to the AA's British Insurance Premium Index.

In its latest quarterly survey, the AA revealed that the average premium for comprehensive car insurance has jumped by 5.6% in three months. For third party, fire & theft cover, the increase in the third quarter of 2009 is nearly a tenth (9.3%), as shown below:

Car insurance premiums shoot up

Source: The AA's British Insurance Premium Index

In the past 12 months, the cost of a typical comprehensive car insurance policy has risen by £100, from £721 to £821 (up 14%).

For third party, fire & theft cover, the increase is even more dramatic, thanks to insurers withdrawing from this market. The average premium for this type of policy has shot up by £159, from £900 to £1,059 (up almost 18%).

The AA has produced its British Insurance Premium Index since July 1994, and these are the steepest premium increases ever recorded. Over the 15 years that the index has been going, the cost of comprehensive insurance has risen by 150%, which works out at 6.3% a year. For third party, fire & theft cover, the premium increase since 1994 is 183%, or 7.1% a year.

Therefore, this year's premium hikes are almost three times as steep as usual. As a result, British drivers should brace themselves for sharp hikes at renewal time. Indeed, with some insurers upping their premiums by 20% or more, your next renewal notice is likely to be a shocker.

You know what to do!

The AA's survey gets quotes from over 90 insurance companies and brokers, covering a thousand different motorists. This gives it a great handle on car insurance costs. It also enables the AA to produce these 'Shoparound' premiums, which average the three cheapest quotes for each customer:

As you can see, the Shoparound premium for comprehensive car insurance is £552, which is £269 below the average premium of £821. Likewise, the Shoparound premium for third party, fire & theft cover is £725 -- a discount of £334 on the typical premium of £1,059.

Of course, the obvious answer is to shop around for car insurance, or you could end up paying hundreds of pounds too much to insure your vehicle. This is particularly the case for young drivers, who usually buy third party, fire & theft cover and face exceptionally high premium hikes.

Bad news for homeowners, too...

Over the past year, there's been a sharp rise in the cost of buildings insurance, as the following table reveals:

As you can see, the average buildings insurance policy costs almost a tenth (9.8%) more than it did a year ago, largely because of rising claims for storm damage and flooding.

However, the cost of contents insurance has fallen very slightly, plus a combined home insurance policy exactly the same as it did a year ago. Again, it pays to shop around, as it often works out cheaper to combine your buildings and contents into a single policy.

Finally, here are the Shoparound premiums from the AA's BIPI survey of home insurance:

If you're looking to cut your insurance costs, check out this goal to find out how best to shop around, buy the right type of policy, reclaim rip-off premiums and, most importantly, save hundreds of pounds on insurance! Read the goal now

More: Find quality quotes for car insurance and home insurance | Slash the cost of car insurance | Don't fall for this insurance swindle