Car insurers must release brakes on premiums soon

SHOULD we expect motor insurance costs to rise? It's March and the rush to buy newly registered cars will, over the next few weeks, release thousands of used cars on to the market. It's a busy time too for the insurance industry and there's no doubt that buyers are becoming much more savvy about finding the best car insurance deals. According to the AA's British Insurance Premium Index, the average premium quoted for car insurance has been fairly static over the past five years - indeed, typical comprehensive cover is a little cheaper than it was three years ago. The average premium quoted for comprehensive cover is currently £760. The market has become increasingly competitive - partly influenced by the internet as more people become confident about buying online. Indeed, about 15% of all car insurance is now bought in this way. Not much, you might think, but this is an almost three-fold increase over 12 months. Non-traditional channels such as supermarkets and other high-street retailers are also taking a bigger slice of the market. The consumer's desire for new cars is falling - Britain's 26 million drivers have an estimated 30.4 million cars but, according to research organisation Mintel, the slowing property market and rising levels of debt are stunting the growth of the UK car population. At the same time, the 'grey' market is growing rapidly, while according to the Department for Transport's latest statistics, young people are much less likely to hold a full driving licence now than at any time since the late 1970s. So we have a relatively static market and customers are spoilt for choice. Car insurance is sold almost exclusively on price rather than benefits, and the industry last year spent a staggering £164m on advertising - four times more than in 1999 - appealing to this market. As a result, the lid has firmly been kept on average car insurance premiums, which is a good thing for customers. Or is it? The stark truth is that insurance company costs are rising much faster than premiums, and it's not just marketing costs that are going up. Despite safer roads and a generally falling trend in the number of accidents, the cost of insurance claims is rapidly rising. The Association of British Insurers estimates that accident claims inflation is rising by up to 6% per year because of increasing labour costs and the growing complexity of modern cars. Today's cars are designed with 'crumple zones', which means much more damage to the vehicle in an impact but greater protection for the occupants, leading to much higher repair costs than in the past. Similarly, we live in an increasingly litigious society, assisted by the growing number of companies offering to help accident victims pursue personal injury claims, adding a further 12% per year to claims inflation. These costs ultimately find their way to insurance premiums. Add to that the cost of uninsured drivers. It's estimated that about one in 20 drivers in the UK don't pay insurance, and this costs every honest driver on average £30 per year - totalling £500m. This is what the insurance industry contributes to the Motor Insurers' Bureau, which compensates the victims of accidents caused by uninsured drivers. In 2004, the insurance industry earned about £9.5bn in premiums - but paid out £9.6bn. So it's clear that the 'elastic' between premiums and costs is being stretched to breaking point. And if the elastic breaks, we could well see a sudden hike in insurance premiums and the kind of double-digit premium inflation we saw in the mid to late 1990s. However, it is not all doom and gloom for insurers. The growing 45-year-old-plus market is more stable and presents lower risks than younger drivers. Young drivers are set to increase in number over the next five years. And the ending of 'days of grace' for customers who renew their car insurance late (and are thus driving without insurance) and other changes aimed at cutting the number of uninsured drivers will take pressure off insurers. So although the danger of a sudden increase in premiums later this year is certainly present, it is more desirable that the industry introduces gradual premium increases. That would be better for customers and for the reputation of the industry. aource: scotlandonsunday.scotsman.com