Personal Injury Toll

With the Bank of England base rate having fallen to its lowest ever levels, and both savings and mortgage following suit, many people might expect car and home insurance premiums to do much the same.

Yet if the AA British Insurance Premium Index is anything to go by, premiums seem to be doing just the opposite.

First, let's explain how the Index works. It is much like other indices, such as the Retail Prices Index, in that insurance quotes for a 'basket of customers' spread throughout the UK are obtained from a wide range of insurance companies, brokers and insurance schemes – over 80 in the case of car, and over 70 in the case of home. The Index provides an average quoted premium, based on all quotes for each 'customer' and a Shoparound premium for the lowest three quotes for each 'customer'. As its name suggests, the premium quoted is closer to what most people would expect to pay for their cover.

Upward trend

So what has the latest Index shown? Well, let's take car insurance first. The average quoted premium rose by nearly 3% over the past quarter, and nearly 9% over the year, to a new high of £742. The Shoparound rose by 2.5% over the quarter and more than 7% over the year. And the AA thinks this upward trend is set to continue. But why?

Simon Douglas, director of AA Insurance, explains. "It's true that there is widespread price-cutting across credit-crunch Britain, but the costs insurers are facing are rising fast. The main culprit is personal injury claims and the associated legal expenses, which rose by over 22% in 2007 to a staggering £6.16 billion*. It's insurance companies that pick up the tab. Remarkably, whiplash injury claims alone account for £66 for every car insurance policy sold."

Fraud costs

Other costs are the £30 per insurance policy paid in compensation to people who have been involved in an accident with an uninsured driver while insurance fraud is also costing the industry millions.

"Some experts think insurance premiums might rise by 20% over the coming year to compensate for these costs – but I believe that while they will certainly go up, 10 to 12% is more likely, because the market remains very competitive," Simon Douglas adds.

Turning to home insurance, the news is much better. Although the average quoted premium for buildings cover went up by more than 5% over the past quarter (7.5% over the past year) to £218, it actually fell for contents insurance to £123. Shoparound premiums also fell for contents to £67 but stayed much the same for buildings cover at about £122.

Competitive

"This underlines how competitive the home insurance market is," says Simon Douglas. "But I do encourage you to shop around – or let the AA shop around for you – to make sure you get the best deal for them, not just the cheapest premium: when you make a claim, that's the wrong time to discover you sacrificed benefits when you took it out!"

Simon Douglas continues: "I think that home premiums will continue to remain great value over the coming year, although premiums are likely to edge upwards.

"The best way to get great value cover is to ask the AA to search its extensive panels of car and home insurance companies to find you the cheapest deal. And with the AA, you know that you have trustworthy cover that features useful benefits other companies may not include."

Find out more about the British Insurance Premium Index and see graphs going back to 1994, when the AA first started recording the quarterly movement of car and home insurance premiums.

* Source: Association of British Insurers