Soaring car insurance premiums threaten to price thousands of young and low-income drivers out of the market and spark a sharp rise in the number of uninsured vehicles on the roads, say motoring industry experts.

The annual cost of insuring a car has risen by a third in the past nine months as insurance companies struggle to meet what they say is a swingeing escalation in fraudulent claims and the cost of settling personal injury claims.

An average premium now stands at £704 – an 11 per cent rise in the last three months – but young people and those on low incomes are being hit hardest. A male driver under 21 seeking to insure his first car can expect to pay at least £1,000 and many insurers are phasing out cheaper third party fire and theft policies for younger drivers or placing the heaviest price rises on them – up nearly 16 per cent in the last quarter.

Motoring groups warn that a consequence of such large increases is likely to be a rise in the estimated 1.5m uninsured drivers on Britain's roads, as car owners take the risk of detection rather than renew policies at a higher price, despite increasing success by police and the industry in cracking down on those who drive without insurance.

Edmund King, the president of the AA, which owns one of the country's largest insurance brokers, said: "Third party fire and theft policies are rising at a rate even higher than others and this is precisely the type of policy that is bought by younger drivers, who are already paying larger premiums anyway.

"There is a danger that the extra burden on new young drivers will price them out of the market. And yet a proportion of them will still drive while uninsured. Also, if you live outside the cities and need the car to get to work but are on a modest income, then these types of increases can have a negative effect.

"There are things an older driver can do to mitigate this but for the younger driver there is often no way out. There has to be a responsibility on companies to help their future customers by adopting more radical alternative policies, such as a 'pay as you drive' system if you have low annual mileage and don't drive at night. The current situation puts pressure on people to be fraudulent about insurance."

Industry experts are warning of a vicious circle in which a rise in uninsured drivers, many of whom are aged between 17 and 34 and are statistically more likely to have accidents, leads to a rise in insurance premiums, thereby further increasing the number of uninsured drivers. The decision by the Chancellor, George Osborne, to use the Budget to increase insurance premium tax from next January will add £15 to the bill for some young drivers.

The insurance industry argues it has been placed in an impossible situation by a sharp rise in the costs of settling claims, meaning that while it takes £10.6bn in motor premiums, it pays out £11.2bn – leaving it with an annual shortfall of some £600m which it can no longer subsidise. According to the Association of British Insurers (ABI), the cost of settling an average personal injury claim has risen by nearly 40 per cent in seven years.

The ABI said it was "possible" the current rises would lead to more uninsured drivers but insisted the market was not being skewed against younger or lower income drivers. A spokesman said: "You will still get uninsured drivers at any time, even when prices were lower. It is still a competitive market and insurers are doing everything they can to mitigate premium increases."

The risk of being caught driving while uninsured has risen significantly due to technology. Number plate recognition systems used by police now automatically alert officers to an uninsured vehicle, while a new system due to be put in place next spring will see drivers sent a letter threatening a £100 fine if their insurance lapses and they continue to drive.

Costs up, convictions down

*15.9 per cent: the increase in the cost of third-party fire-and-theft policies, often bought by young drivers, in the last three months.

n £1,000: the average cost of 12 months' insurance for an under-21-year-old male buying his first car

*35.9 per cent: the increase in motor insurance in the last 12 months

*185,000: the number of uninsured cars seized by police each year since 2005

*235,000: the number of convictions in 2008 for driving without insurance

*447,000: the number of convictions in 2003 for driving without insurance

The uninsured driver: 'Insurance for young people is sky high'

Car insurance is just too expensive for young people. When I started to look for car insurance, I couldn't believe how much I was being quoted. I bought the car for just £300 but some of the insurance companies wanted to charge me over £3,000 per year to get it on the road. The most expensive quote I was given was £4,600. I live in a three bedroom house in east London. My house has its own driveway and it is not on a busy road. I thought that would make it much cheaper, but it didn't seem to.

I was so eager to drive my new car that I decided to go out on the roads uninsured. I know it's wrong, but insurance for a young person is sky high. I carried on driving without any insurance for around a year. During that time, I managed not to get caught or have any accidents. It was only when one of my friends got six points on their licence and a driving ban that I finally decided to get the vehicle insured. I'm now driving as part of my mum's car insurance. That was the cheaper alternative

I think the cost of the insurance is the only reason people drive uninsured.

The writer, who wished to remain anonymous, is a 21-year-old student from Chingford

Search for used cars