British Insurance Premium Index

Insurance premiums stall

17 April 2008

Premium hikes widely predicted for both car and home insurance because of increasing costs and the aftermath of last year's flooding are not being realised, the latest benchmark AA British Insurance Premium Index reveals.

After a year of increases that have added nearly 6 per cent to the average annual premium quoted for comprehensive car insurance, the Index recorded a slight fall. It now stands at £682, just £3 less than at the end of 2007 but £37 more than this time last year.

Similarly, the first quarter of 2008 shows average quoted premium for buildings cover remaining at about £209 while contents insurance rose by just 1 per cent to £129. The average premium for combined buildings and contents cover, recorded for the first time in the AA study, has fallen by £4 to £293.

Andrew Strong, CEO of AA Insurance, says: "A recent Datamonitor report suggested that the car insurance industry could become profitable by the end of 2009 - but we calculate that an annual premium increase of 20 per cent would be needed to achieve that. The latest AA Index shows that this is a far from realistic expectation.

"Similarly, speculation that home insurance premiums would rocket because of last year's floods was clearly wrong. But I do expect premiums to continue rising over the remainder of the year."

Car premiums coasting

Car insurance premiums levelled off during the first quarter - reflecting the pattern of 2007 although the trend is upward. "March is a peak period for car insurance sales with many companies holding rates to gain market share," says Andrew Strong.

"But insurers continue to be squeezed between increasing costs such as legal expenses and personal injury claims, and competitive pressure. For every £100 taken in premiums, the industry shells out £112 in claims," he points out. "If premiums don't continue to rise at a realistic rate, there will be a point when large premium increases become inevitable. That would be unhelpful for customers and will damage the reputation of the industry."

The Shoparound Index for comprehensive insurance (an average of the cheapest three premiums for each Index risk) also fell, by just 1.2 per cent to £459.44.

Car insurance at a glance

  • Average comprehensive car insurance premiums fell 0.5% to £681.93 (£685.29 in previous quarter). The Shoparound premium fell by 1.2% from £464.83 to £459.44.
  • Average TPFT car insurance premiums fell 0.9% to £838.50 (£846.28 in previous quarter). The Shoparound premium rose 1.6% to £549.35, from £540.69.

Home premium rises dry up

Home insurance premiums changed little over the first quarter of 2008. The average quoted premium for buildings cover fell by just 42p to £208.51 and the Shoparound premium (an average of the lowest three quotes from each Index risk) fell by just 34p.

"I expected the upward trend in premiums since last July's flooding to continue," Andrew Strong says. "I believe the slight fall in average quoted premiums for buildings cover is explained by a rise in the number of risks not being quoted by some insurers, suggesting sensitivity to flood risk."

However, he emphasises that this does not mean families will find their homes becoming uninsurable. "It is more likely that insurers will want to know more - for example what flood protection measures are being taken by local authorities - before quoting, while an existing insurer will continue to provide cover following a flood."

Under the ABI Statement of Principles for the Provision of Flood Insurance the industry agrees to insure flood-risk customers provided adequate investment in flood defences continues. "But the Government shouldn't take it for granted that the agreement will continue to be renewed indefinitely. It's vital that proper investment is made to protect homes and businesses from flood risk and that careful consideration is given to the location of new housing stock."

He adds that although buildings insurance premiums increased last year to their highest point ever, they are still only 4.5 per cent higher than when the Index started in 1994: "Home insurance continues to offer remarkable value for money," he says.

Home insurance at a glance

  • Average buildings insurance premiums fell 0.2% to £208.51 (£208.93 in the previous quarter). The Shoparound premium, an average of the lowest three quotes for each risk, fell by 0.3% to £120.70 from £121.04
  • Average contents insurance premiums rose 1.0% to £128.57 (£127.24 in previous quarter). The Shoparound premium rose by 0.3% from £70.08 to £70.29
  • Average combined home and contents insurance quotes fell 1.4% from £297.19 to £293.11. The Shoparound premium rose by 0.3% from £183.31 to £183.80.

Notes to Editors

The AA British Insurance Premium Index has been tracking both home and car insurance premiums since July 1994 and has become an industry benchmark for measuring premium trends. The Index now tracks a basket of 1,000 motor risks (800 comprehensive and 200 TPFT) against premiums from 85 insurers, brokers and insurance schemes and a basket of 750 risks for each of home buildings, contents and combined from 77 insurers, brokers and insurance schemes. Where a provider typically offers the cheapest premium from a panel of insurers, the cheapest is tracked (rather than all of them) which provides a more realistic comparison. The Shoparound premium is arrived at by averaging the cheapest three premiums for each risk.

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17 April 2008