U-turn on car cover

The policy price wars are over: watch out for hefty rises in premiums

If you were among those driving a "W" registration car out of a showroom last Wednesday, the price displayed on the windscreen was just the beginning. Added extras, such as car insurance, all bump up the price - especially this year.

If you were among those driving a "W" registration car out of a showroom last Wednesday, the price displayed on the windscreen was just the beginning. Added extras, such as car insurance, all bump up the price - especially this year.

Those drivers whose policies are up for renewal in the coming months should be warned that insurance companies expect premiums to increase even further.

In the past year they have risen between 10 and 30 per cent, with further increases of up to 15 per cent predicted. Drivers are in for a hefty hike in premiums this year.

"Insurance rates tend to run in a cycle," says Ian Frater, spokesman at CGU. "They start off at the correct rate, then go up slightly, then new players enter the market and undercut existing players. At the moment we are seeing the climb back up after the price-cutting and it seems highly likely that further increases will be seen before things level off again."

Insurers argue that consumers have been enjoying the rich pickings of a false market over the past couple of years. Direct Line, the telephone insurance company, had a big impact as it offered consumers cheaper cover. The result was significant price slashing as other firms tried to match its premiums.

"Following the significant cuts many companies have instigated over the past few years, the motor insurance market as a whole is now realising that it cannot afford to sustain such levels and is consequently having to hike up prices," says Chris Wermann, head of corporate affairs at Direct Line.

He said: "In many ways we are lucky in that we did not want to get into a price war with other insurance providers, which means that we are not faced with the same pressure of having to raise our premiums significantly.

"We maintained a policy of increasing rates progressively by about 5 to 6 per cent a year and are continuing the same level of increases.

"This means that our customers are not having to face huge jumps when they come to renew their cover, and we are also capturing new custom from people who are."

Paul Baxter, head of insurance at Tesco personal finance, which has just started offering car insurance, says the motor insurance industry lost £1.2bn in 1997.

Losses such as these illustrate just how uneconomical the sector had become.

In addition to rock-bottom insurance premiums, there are other factors driving up charges. In general, an increasing number of claims are being made every year.

The average cost of pay-outs is also increasing because of higher personal injury costs. Insurance companies also have to pay hospital trusts for the cost of patient care after accidents.

Added to this is the fact that 5 per cent of motor insurance premiums go directly to the Government, following the introduction of insurance premium tax five years ago.

The merger of large companies, such as CGU and Norwich Union, is also set to result in further premium increases because as the number of insurers decreases, competition will be reduced. There are fears that large market players such as Axa, the French insurance giant, and the combined CGU/Norwich Union wield too much power so they can increase prices with little risk.

What can consumers do? The answer is to shop around. Young drivers are heavily penalised by insurance companies, but you can save up to 30 per cent on annual cover by restricting the number of drivers on a policy.

There are companies or intermediaries that specialise in underwriting policies for specific groups, so it is well worth checking these out when you are shopping around. Target groups include under-25s, over-50s and women drivers.

Savings can also be made if your mileage is low or you opt for a higher excess.

The task of shopping around for the best deal is easier since the arrival of internet brokers.

Many insurers, meanwhile, have online facilities allowing you to get a quote in a matter of minutes. The AA is offering a 10 per cent discount to people who apply for insurance via the internet.