Why car insurance premiums are on the rise

AA blames fraud crackdown failure for increase in over two years.
AA blames fraud crackdown failure for increase in over two years.

The cost of car insurance is creeping up according to the latest AA British Insurance Premium Index.

It found the typical quote for someone who shops around for an annual comprehensive car insurance policy rose £6, or 1.2%, to £531 during the third quarter of 2014.

The AA says that's the first quarterly rise in the cost of motor insurance recorded since early 2012, more than two years ago.

Meanwhile the overall market average – made up of all quotes, not just the cheapest deals – for a comprehensive car insurance policy rose much more sharply by £36, or 4.2%, to £891 over the same period.

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What's to blame?

The AA says the figures suggest that while competition is still strong and shopping around gets you a better deal, claims pressure is forcing premiums up.

Insurers reduced prices in anticipation of reforms from the Laspo (Legal Aid, Sentencing and Punishment of Offenders) Act in 2012 that promised to cut the number of fraudulent personal injury claims, particularly whiplash injuries.

However, the AA says claims management companies appear to have found ways around reforms with many insurers reporting a surge in the number of lower-value 'cash for crash' claims.

These involve a driver deliberately braking in order to cause the car behind to crash into its rear. The driver then claims from the innocent party's insurance company for whiplash.

The average cost of meeting such claims is estimated to add around £90 to the typical cost of a car insurance policy.

The AA also points to recently released figures from the Association of British Insurers (ABI), which show over 180,000 attempts were made to get cheaper cover by providing false information in 2013.

This trend is estimated to add an extra £50 to the average annual insurance bill.

It is hoped that the introduction of the My Licence database scheme will help drive down fraudulent policies. This tells insurers if a driver has had any past convictions.

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'Missed opportunities'

Janet Connor, managing director of AA Insurance, says that opportunities have been missed for more legal reforms to stem the tide of fraud, which has resulted in the price rise.

This includes banning whiplash claims for low speed impacts and paying compensation for successful injury cases to providers of medical rehabilitation rather than the claimant.

She adds that ditched reform suggestions like independent medical panels to assess whether a whiplash claimant has been genuinely injured and increasing the small claims court limit from £1,000 to £5,000 could have helped.

She adds: "My view is that many opportunities have been missed. As a result, I believe that this small upward move in premiums will lead to further modest increases over coming months."

"My hope is that increases will be cautious: it is much better that premiums rise gradually than customers eventually face another series of massive price increases as happened in 2009/10. How far they continue to rise, however, will depend on how effective the recent reforms eventually prove to be."

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