Big rise in cost of car cover

THE COST of insuring a car is likely to increase by 10 per cent this year, meaning motorists on average will have to pay an extra pounds 45 in premiums, according to the Automobile Association.

The AA yesterday said the average cost of a comprehensive car insurance policy was about to leap from its current level of pounds 440 to more than pounds 480 by the end of the year.

Premiums have already risen by 10 per cent since the beginning of 1998 and the average cost of a policy has jumped by pounds 110 since rates hit their nadir in early 1996.

The rise has been initiated by motor insurers who are desperate to make a profit after years of taking losses on private motor insurance business. The biggest players in the market include Direct Line, CGU, Royal & Sun Alliance, and Guardian Royal Exchange.

Last year the industry as a whole lost pounds 1bn because claims and costs were 20 per cent higher than the income from premiums.

According to Stephen Bird, an insurance analyst, the big companies are playing "a game of chicken" on motor premiums, waiting to see who will raise rates first. As soon as a company raises premiums, customers can be lured away.

Barry Smith, the executive director of AA insurance, said big insurers had so far kept rates low in an effort to knock out the competition. Price rises could then become permanent.

"In the longer term, fewer insurers could mean less competition and higher prices. We expect to see average rates rise by 10 per cent," Mr Smith said.

Motorists can escape the worst of the price increases by shopping around for better premiums. While the average premium for a comprehensive policy is pounds 440, some insurers are still offering rates of just pounds 300.