Bogus and inflated claims, greedy tradesmen and inefficient insurance companies mean that some people prefer to take the occasional loss than continue paying soaring premiums.
Companies say that more motorists are opting for third- party cover rather than comprehensive policies. Some householders are switching to cheaper policies that exclude certain risks such as loss outside the home.
Policyholders are increasingly choosing large 'excess' clauses, whereby they shoulder the first part of any loss. And some insurers are unilaterally altering policies to reduce their risk.
General Accident, Commercial Union and Royal Insurance, which all returned to profitability last week, believe fraud has mushroomed during the recession. Exaggerated and bogus claims cost the industry pounds 400m a year, according to the Association of British Insurers. Loss adjusters, however, who investigate claims, believe the scale of fraud is much higher.
The fraudsters range from motorists who escape the high premiums charged in inner London by falsely giving a rural address, to professional gangs fleecing insurers of tens of thousands of pounds.
Insurance companies still rarely check on small claims. A gang from Bournemouth put in at least 41 claims for lost rings, freezer breakdowns and other minor losses, swindling insurance companies out of pounds 18,755 over 11 months.
One common ploy is to exaggerate the level of loss in a real burglary or theft. According to Bob Scott of General Accident: 'No one who loses a suitcase on holiday ever claims for Marks & Spencer underwear. It's always from expensive shops.'
Mr Scott believes fraud is getting worse, a view echoed by Commercial Union. Peter Foster, general finance manager, says exaggerated claims - which at CU come under the umbrella term 'social inflation' - are rising. 'I think it's partly because of recession, partly because of a change in attitudes. People are more inclined to put in a claim that overstates the truth.' Some people see it as barely immoral at all, like speeding.
According to Bev Fitzgerald, a director of the loss adjusters Thomas Howell Group, exaggerating claims is not illegal. 'The law accepts there is an element of negotiation in insurance claims. To be fraudulent, claims have to be grossly exaggerated.'
He said another side of the problem was tradesmen who issued false invoices, abetting policyholders to put in false claims. 'They have become very cute at knowing at what level of claims insurers start investigating.'
At least one in four household insurance claims is exaggerated, in many cases by as much as 50 per cent, according to a survey of loss adjusters taken earlier this year.
Car insurance premiums have risen by about 50 per cent over the last two years, with rates for young drivers of high performance cars up by 100 per cent or more. Household insurance premiums are up by about 35 per cent.
However, the Consumers' Association says insurance company profits are excessive, with customers being forced to pay for the past mistakes of insurers, especially in the housing market.
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