Car cover soars as fraud and fronting takes effect

Cheap motor insurance looks over as insurers start to reclaim their costs. Can you keep premiums down? Simon Read reports

The cost of car insurance has soared by almost a third in the past year. The average yearly premium for comprehensive cover is now £599, according to the latest Confused.com/EMB Car Insurance Price Index.

The biggest rise came in the last quarter, with the average cost of comprehensive cover climbing 14.2 per cent between April and June – far higher than rises of 4.3 per cent and 6.3 per cent in the two previous quarters.

Parents aged between 41 and 55 faced the heaviest increases in the cost of comprehensive cover, reflecting a generation of people putting their children on their policies. Women suffered most from this, with those aged 41 to 55 having to pay 14 per cent extra for having named a driver other than their husband.

Why are premiums climbing so quickly? There are a number of issues forcing prices to sky-rocket, according to those within the insurance industry. The first that premiums have been kept artificially low in recent years by fierce competition in the market; motor insurers have effectively bought in masses of new business by slashing their profits to the bone.

At the same time, the costs of settling claims have gone up, not least because of a huge increase in fraud. That's not just fraudulently inflated claims – which on its own pushes up costs – but also the higher numbers of people putting together "crash-for-cash" and related scams to squeeze money out of insurers. Crash-for-cash is when someone stages a motor accident so they can claim on their insurance policy. As the cost of policing such activity rises, insurers are forced to raise premiums to cover those costs.

A big rise in the number of injury claims from people involved in accidents over the past five years is also having a marked effect. Last year, the cost of bodily injury claims per vehicle increased on average by more than 10 per cent, according to EMB. In fact, data from the Compensation Recovery Unit showed that between 2007 and 2008, the number of personal injury claims in the UK increased by 13.3 per cent, from 551,905 to 625,072. At the same time, the average compensation paid to accident victims increased by 16 per cent, according to the Association of British Insurers.

"It is clear that the growth of a compensation-aware public has increased the sheer volume of injury claims," says Adrian Webb, of Esure. "As insurance is simply matching premiums to claims, that growth is feeding through to ordinary, honest people.

"It takes 10 or more people who do not claim to support each one that lodges for whiplash when they might have previously taken two paracetamol and done nothing."

In fact, recent research by Esure found that four out of five Britons now believe there should be controls over claims companies' advertising to prevent the escalation of exaggerated and potentially fraudulent claims.

The coming together of all these issues, heightened by the growth of comparison websites putting the spotlight on the costs of cover, meant insurers were cutting premiums to build business in the face of higher costs.

"In order to secure customers, insurers have been forced to repeatedly slash their margins but inevitably this could not continue," says Simon Lamble, the motor insurance product director at Confused.com. "Zurich publicly announced in January it was looking to increase prices by up to 20 per cent. This signalled the action the industry has taken in a bid to get back to profit. Increasing claims costs, more injury payouts and fraud have created a situation where providers are not making any money."

While the average cost of an annual policy has climbed by £185.69 in the past year, it is over the past three months that prices have really started to climb. In the second quarter of 2010, £77 was added to the cost of the average policy.

"The dramatic increases seen in the quarter, including a month-to-month rise of more than 6 per cent in April alone for comprehensive cover, come off the back of the reporting of some pretty horrendous 2009 results," says Peter Lee, a partner at EMB. "Insurers' 2009 returns showed the average private car insurer incurred costs of £122 for every £100 of premium received."

That is clearly unsustainable. But as premiums rise, more people are being tempted to break the law by either "fronting" – when someone other than the main driver of a vehicle is declared as the policyholder – or simply driving without cover.

For example, a parent may insure a car and declare themselves the main driver when their child will actually be driving the car.

The growing number of uninsured drivers is also hitting honest ones hard. The insurance industry says it had to pay out about £400m to the Motor Insurance Bureau in 2009 to cover incidents involving uninsured drivers. That works out as an extra £30 on every honest driver's insurance policy.

"With insurance costs rising and household budgets being squeezed, people are more likely to consider gambling rather than forking out for cover they hope they will never have to call into action," says Mr Lamble.

"It is important to remember that ,no matter how safe a driver you are, you cannot rely on the same from other people. Only three in five people think they will be caught but the harsh truth of the matter is that every three minutes someone is convicted for uninsured driving and the fine and points do not tell the full story of the damage."

The tables above show premiums are climbing more quickly in some parts of the country than others. "Regionally, customers in Manchester and Merseyside received the largest quarterly increase," says Mr Lee. "At postcode level, the biggest quarterly comprehensive increases were seen in Bradford, East London and Ilford – all more than 20 per cent."

How to cut the cost of your premium

* Take Pass Plus: while it's impossible to buy the experience that comes with time, this tells insurers you are taking driving seriously. Six per cent of 17 to 25-year-old men do and save, on average, £1037.75 before they reach 25. The 4 per cent of women who take Pass Plus save £390 on average before 25.

* Typically, premiums dip in price when drivers hit 25 but, while waiting, try to build up your no-claims bonus.

* Avoid modifying your car. Insurers will say alterations pose an extra safety risk.

* Consider offering to pay a higher voluntary excess; increasing this can bring down the cost of cover but it is important not to pledge more than you can afford, as it may stop you from being able to claim. Drivers should also ensure that they don't increase their excess needlessly.

* Adding an experienced motorist to your policy as a named driver can lead to cheaper quotes for the young, so if there is any chance that a parent will need to borrow the car it may be worth putting them on, but do not be tempted to make them the policyholder if you are the main driver – this is "fronting".

* Conversely, if you are a parent who still has a child on your policy, this could be driving up your premium.

* Most insurers base their premiums on the amount of miles a person drives in a year, so don't overestimate your mileage. Drivers can always contact their insurer to adjust the mileage should they find themselves using the car more often than first anticipated, according to Confused.com.

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