Drivers’ frustrations ease as car insurance costs stabilise

CAR insurance costs have finally stabilised after a fall in premiums brought an end to two years of record increases, a benchmark report published today reveals.

The average cost of the cheapest quotes on the market dropped by £2 to £921 over the three months to the end of September, according to the latest AA British Insurance Premium Index. In Scotland, the average is £555, the lowest in the UK.

However, home insurance costs are still rising and another severe winter could send them soaring, the report warns.

The modest drop in car insurance costs follows two years in which premiums rocketed to record highs, with the average policy costing 40 per cent more by the end of March 2011 than a year earlier.

The annual increase in premiums has now dropped to 16 per cent, delivering a boost to drivers who have also seen fuel prices rise sharply over the last year.

However, premiums for young drivers, who have borne the brunt of the increase in costs, edged up again in the last quarter despite an encouraging decline in the number of serious accidents involving younger drivers.

The average of the cheapest three quotes from insurers – the “shoparound premium” – for an annual comprehensive policy is now £921.38, up from £791.82 a year ago and virtually double the cost in October 2007.

But the good news is that car insurance costs north of the Border are the lowest in the UK. The average shoparound premium in Scotland is now £555 a year, following a tiny fall over the last year. In contrast, drivers in Yorkshire, London and the North East of England pay on average more than £1,000 a year.

Simon Douglas, director of AA Insurance, said: “The past two years have seen the biggest-ever rises in premiums as insurers struggled to close a widening gap between premium income and claims costs. Although historically costs had been rising, premiums had not and, at the end of 2009, for every £100 taken in premiums £123 was being paid out.

“Something had to give. But the gap has now closed sufficiently to allow insurers to start pricing more competitively once again.”

But Douglas believes the fall in premiums may only offer short-lived respite for long-suffering drivers.

He said: “Premiums are likely to continue rising next year, but at a much more modest rate. I would be concerned if they do start falling, because after a time it could lead to a repeat of the past two years’ sharp premium inflation.”

There was further bad news from the AA, which warned that another harsh winter could send home insurance costs to new highs. The average shoparound premium for buildings insurance hit a record high of £152.18 in the last quarter, up from £133.16 a year ago.

Contents policies are also more expensive, with the average shoparound premium up 5.8 per cent over the last year to £77.21. The average combined buildings and contents cover now cost £205.55, 5.7 per cent higher than a year ago.

Costs have been driven up over the last two years by an increase in claims from households suffering damage during severe winter weather. And events such as widespread floods and snow-related damage over the last two winters mean insurers are increasingly pricing in future costs, suggested Douglas.

He said: “Insurers need to consider the potential for future claims and ensure that they have adequate reserves to meet the cost of any extreme and widespread weather damage: for example major flooding or more severe winters.”