Car insurance price rise is ten times rate of inflation

THE COST of car insurance has surged by more than 10 times the rate of inflation over the past year, according to government figures published yesterday.

Premiums rose by 13.1 per cent in the 12 months to July - compared with a rise in headline inflation of just 1.3 per cent over the same period.

The figures, revealed in the latest official inflation data, will confirm fears that insurers are forcing through massive premium hikes.

The figures come just a fortnight after The Independent highlighted two insurance companies, Royal & Sun Alliance and Norwich Union, which had raised motor premiums by as much as 17 per cent.

The Office for National Statistics, the department that compiles the figures, said the insurers had given four reasons for the rises. These included an increase in Insurance Premium Tax (IPT) to 5 per cent from 4 per cent from 1 July.

Other reasons were seasonal increases ahead of the new car registration letter in September, rises in personal injury awards and new rules making it easier for the NHS to recoup the cost of treating victims of car crashes.

The Department of Health has estimated that if these costs were divided between all policy-holders, each would pay pounds 6 extra. The industry believes it will add pounds 10 to a pounds 260 policy.

Meanwhile, a recent judgment cut the rate of interest used to calculate lump-sum compensation for injuries suffered, substantially increasing personal injury awards. One estimate put the cost to the industry at about pounds 450m or 7.5 per cent of premium income.

Insurance companies are also anxious to put up their prices after a period of stiff competition earlier in the decade triggered by the entry of new players such as Direct Line into the market.

According to analysts Bacon & Woodrow, the motor insurance market lost about pounds 1.2bn in 1998. While premiums were already rising by around 1 per cent a month, they would have to rise by a further 10 per cent to put insurers back into profit, it estimated.

Bacon & Woodrow said rises in personal injury awards such as bodily damage and whiplash would wipe out gains from cuts in claims for theft and damage. In addition, a Law Commission report in April said amounts awarded for bodily injury were currently too low and these awards should increase by up to 100 per cent.

Bacon &Woodrow analyst Nigel Munns said: "As a society we are becoming more litigious and court awards for injury claims are increasing significantly faster than inflation. One of the biggest challenges facing insurers over the next few years will be deciding how best to fund the additional cost of these bodily injury claims".

The ONS said the amount of money spent on motoring rose between June and July. The increase was also driven by a surge in the price of crude oil, which rose 22 per cent in July.

Stubborn inflation,

Business, page 14

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