Who counts the cost of a price war?

The battle for market share in the motor insurance industry peaked in 1996. Now the backlash is hitting motorists hard

Car insurance premiums are soaring as underwriters scrabble to make up for years of loss-leading deals and get their business back on a profitable footing.

Car insurance premiums are soaring as underwriters scrabble to make up for years of loss-leading deals and get their business back on a profitable footing.

That's the message from a new AA survey, which shows the average cost of fully comprehensive car insurance has climbed by 64 per cent from £341 a year in July 1996, to £561 in July 2000. The picture is the same for basic cover, where average premiums have risen by over 58 per cent in the past four years to reach a figure of £556. These rises put car policies in stark contrast to other general insurance, such as buildings cover, where average premiums have fallen by 8 per cent in the same period.

Experts blame the cost hikes on the backlash from a motor insurers' price war, which reached its peak in 1996. This battle for market share reduced insurers' premium income, just as higher court compensation awards started to drive the cost of meeting personal injury claims through the roof. Industry rumours insist one insurer is fighting a personal injury claim of £3m.

David Cubbin, of East Anglian motor brokers Ryan Insurance, says: "Some people in the direct market were underpricing, and they started to realise they were making losses. They have all moved towards trying to get their book back onto a more solid basis. It's in the past 24 months that the rise has come, and it has been very dramatic."

AA spokesman Luc Warner adds: "Claims costs have risen hugely - especially personal injury ones - so what insurers have got in the pot to pay claims is not remotely fitting the bill. They are putting prices up because they have been losing billions over the past few years on claims."

This process has been heightened by a string of takeovers among motor insurers, reducing the number of companies in the market and so cutting the competitive pressure on prices. Since July 1996, Royal Insurance has merged with Sun Alliance, Axa with Guardian and CGU with Norwich Union. The Royal/Sun Alliance and Axa/Guardian deals alone have brought a total of over 4.5 million private motor policies under the control of just two insurance groups.

Ryan Insurance research shows that no fewer than 26 motor insurers have either been swallowed by larger rivals or withdrawn from the market in the past five years. Mr Cubbin attributes this to small insurers realising they could not afford the investment needed to compete properly in this ferocious market. If Mr Cubbin is right, the consolidation is not yet finished.

He warns: "There is still more capacity out there to write motor premiums than there are motor premiums in the market."

There have been liquidations too, most notably Drake Insurance, which went bust in May with over 200,000 private motor policies on its books. Drake had about 25,000 claims outstanding when it went under, which must now be met by the Policyholders' Protection Board. So far, the board has made 709 payments to Drake customers, totalling £1.65m.

As the table shows, the customers hardest hit by this contraction are often young drivers who cannot rely on a no claims bonus to reduce their premiums. Some drivers in this category have seen the average premiums they are quoted double since July 1994.

A 25-year-old Bournemouth shop assistant driving a 1988 Vauxhall Cavalier GLSi 2.0 without a no claims bonus, for example, would be asked to pay an average premium of £862 for basic cover now, compared to just £437 six years ago. Mr Warner says: "Insurers have been clamping down even harder on people who haven't got any no claims."

Just as the battle for market share gave way to concerns about profitability four years ago, the current round of price rises cannot go on forever.

Mr Warner says: "These things go in cycles. Every now and again, somebody breaks from the pack and the cycle takes its next turn. But that will not come until well into next year." Mr Cubbin adds: "By the tail end of 2001, I think we could find rate competition starting to creep in strongly again."

If you cannot afford to wait until then before your own next renewal, be sure to shop around for your cover. The AA says simply phoning around to get the best quote can save as much as 30 per cent on the premium you pay.

To test this proposition, we asked Mr Cubbin to run the details of the AA's ten worst-off customers through Ryan's own systems and find the best quotes he could.

The results show shopping around could save these drivers anything from 6 per cent to 45 per cent on their July 2000 car insurance premiums.