Insurance premiums set to change gear

Motor insurance premiums are set to rise after a steep 18-month fall in prices, according to research by the Automobile Association's insurance arm.

Although the average cost of cover fell more than 2 per cent in the year to July, premiums rose by 1.5 per cent in the past quarter, a survey of 37 different insurers showed yesterday.

The potential turn in the market has, however, left household policies unaffected. Premiums continue to fall, recording an average annual drop of more than 4 per cent.

Mark Wood, managing director at AA Insurance, said: "It may be a little early to suggest that car insurance premiums are definitely moving up again.

"But the movements of the past few months suggest that after two years of cost-cutting and loss-leading among some insurers aiming to win market share, the market may be firming up again."

The move towards firmer motor premiums comes as some insurers who recently began telephone-based cover attempt to stem vast losses suffered in their bid to capture market share.

Steven Bird, insurance analyst at Smith New Court, said: "Some motor insurers have clearly plucked up enough courage to implement rate rises in the second quarter."

His comments came despite an announcement by Direct Line, the UK's biggest telephone-based insurer, that it is to cut rates by up to 20 per cent for new and existing policyholders.

The company said the reductions would involve discounts of up to 10 per cent for restricting cover on named drivers.

Further premium cuts will apply to some car models, plus 150 lower-risk postcodes.

A Direct Line spokesman said that about 50 per cent of UK drivers stood to benefit from the reductions by an average of 5 to 10 per cent.

But he admitted that, in a bid to offset share price falls by Direct Line's parent, Royal Bank of Scotland, when the rate cut was revealed on Tuesday, the insurer briefed analysts saying that the aggregate annual reduction would only be 1.5 per cent. At close yesterday, RBS shares were down 5p to 432p, after an 8.5p drop on Tuesday.

"What we have been saying is that if the cuts were simply applied to our existing policyholder base, this would lead to an overall reduction in premiums of 1.5 per cent," the spokesman said. "But we anticipate the cuts will apply even more to new customers. We are expecting more than three million calls for quotes in July, August and September."