New AA British Insurance Premium Index

Biggest ever premium increases

28 January 2009

Customers paying more as new AA British Insurance Premium Index records biggest ever premium increases

  • Car cover costs rose by more than 7% over last quarter of 2009
  • Both home buildings and contents rise sharply
  • Aggregator rates rise fastest

Car Insurance premiums, which have been rising at record rates over the past year, took their biggest ever upward jump during the last quarter of 2009, according to the latest benchmark AA British Insurance Premium Index.

The 'Shoparound' premium – an index of the cheapest quotes – rose even more spectacularly, increasing by over 11 per cent, which suggests fewer cheap deals on car insurance.

Home Insurance premiums are also rising, with the cost of home buildings cover continuing to rise sharply while a falling trend in the cost of contents premiums has been reversed.

The quarterly Index shows that over the year, the average quoted premium for comprehensive car insurance has accelerated steadily, adding over 18 per cent to the average premium quoted last year.

AA Insurance announced these findings on Wednesday 27th January at the re-launch of its Index, which has been tracking the movement of both car and home insurance premiums since 1994. The number of quotes on which the Index is based has more than doubled while premiums from price comparison sites are included for the first time.

Car insurance

Main Index findings for the fourth quarter 2009:

  • Average quoted premium for an annual comprehensive car insurance policy rose over the fourth quarter by 7.2 per cent to just over £1,000
  • Average quoted premium for Third Party, Fire & Theft (TPFT) cover rose by 8.9 per cent to £1,252

Shoparound index, an average of the three lowest quotes for each 'customer' in the basket of risks

  • Comprehensive cover rose by 11.3 per cent to £613, while TPFT rose by 13.9 per cent to £788

NEW: Aggregator findings:

  • Average quoted premium for both comprehensive and TPFT cover rose by 12.7 per cent, comprehensive to £674 and TPFT to £684
  • Average Shoparound premium increased for comprehensive by 9.6% to £506 and for TPFT by 10.8% to £602

Annual movements:

  • Average quoted premium for comprehensive cover rose by 18.7 per cent: by far the largest annual increase since the Index started in 1994
  • TPFT cover, typically bought by young and newly-qualified drivers, rose by 23.8 per cent over the year
  • The Shoparound premium rose by 22.6 per cent over the year for comprehensive cover and an unprecedented 33.4 per cent for TPFT

These results do not include the 20 per cent premium increase announced by Zurich earlier this month.

Comment

Simon Douglas, director of AA Insurance, says that insurers have been struggling to overcome exhausted reserves while coping with sharp rises in settlement cost and frequency of personal injury claims. He point out that some commentators have said that average claims costs have seen payments outstripping premium income by up to 20 per cent and, as a result, the Index has seen its largest ever annual premium increase.

"Many insurers have been reporting significant rises in personal injury claims. Many people seem willing to pursue claims for even minor injuries, such as mild whiplash pain that in the past they wouldn't have bothered claiming for. This is encouraged by personal injury claims lawyers whose marketing urges people to make claims and whose costs, as well as compensation for the claim, are met by the third party insurer. This is becoming increasingly embedded in British culture and, ultimately, feeds back to premiums.

"The cost of accident damage has also been rising steadily, despite a fall in the number of accidents on Britain's roads. The spate of collisions during the recent wintry spells, resulting in about 30 per cent more claims than normal, may reverse that trend over the short term, though.

"In addition, insurers are suffering increasing fraud which contributes to rising costs. Only last week the National Fraud Authority (NFA) said that fraud is costing the country twice as much as previous estimates, while insurance fraud is costing the industry around £2 billion a year which amounts to £44 on every household's insurance budget.

"As a result, many insurers are reporting record underwriting losses. The situation is clearly unsustainable and the inevitable result is that premiums increase, despite the extremely competitive nature of the market."

Douglas points to the fact that both the Shoparound and Aggregator Shoparound premiums, which are close to what customers actually pay for their cover, are increasing at a significantly faster rate than the underlying Index trend.

"The sharp premium increases that the Index is recording suggest that the cheapest deals and offers are drying up," he says.

He adds that by the very nature of price comparison sites, buyers are less likely to be loyal – they will shop around again when their premium is due for renewal. "Insurers are well aware of this and are becoming less likely to offer generous introductory rates because there's little chance they'll retain the customer at a realistic renewal premium."

Will car insurance premiums continue to rise over 2010?

Douglas points out that premiums during the first quarter of each year have historically remained static as a high percentage of renewals take place at this time, while insurers compete for business during the March peak in car sales with the registration change.

"But last year, premiums rose significantly during the first quarter for the first time since the Index started. So far this month, there is no sign of premiums easing," he says.

"I believe we will continue to see premium increases over the coming year, and this is underlined by Zurich's announcement. They may, however, level off during the third and fourth quarters as insurers' ratios improve."

Douglas says that legislation changes over the coming year should also help to contain costs.

"New legislation to allow for the issue of electronic insurance certificate is expected this year which should streamline the process of issuing documentation.

"In addition, introduction of continuous insurance, which means it will become an offence to keep an uninsured car even if it isn't driven on the road, unless a Statutory Off Road Notification (SORN) has been made, is expected to help identify more uninsured drivers before they can cause damage to other people and property."

It is estimated that uninsured drivers represent around 1 in 20 vehicles on Britain's roads and claims involving them add around £30 to every annual motor insurance policy. "Both measures are to be welcomed although the real returns won't be noticed for some months."

In addition, new fast-track rules will be introduced by the Ministry of Justice to streamline the process and reduce the cost of meeting personal injury claims. "This is long overdue and is a welcome step," Douglas adds.

NEW: Regional and age breakdown

(Comprehensive cover only)

  • All regions (based on ITV super regions) experienced significant premium increases over the past quarter of 2009. The largest jump was in Anglia with an average rise of 9.6 per cent, followed by Border & TyneTees with 8.8 per cent increase
  • Wales saw the smallest increase with just 5.7 per cent added to the average quoted premium, with Scotland not far behind with a 6.1 per cent rise
  • Those aged 23 to 29 suffered an average 9.3 per cent increase in premiums over the past quarter. The smallest increase (3.3 percent) was for those aged 70+

Home Insurance

Cost of buildings cover still rising

Main Index findings:

  • Average quoted premium for an annual home buildings insurance policy rose 5.9 per cent over the fourth quarter of 2009, to £199
  • Contents premium increased by 6.4 per cent, to £113
  • The cost of a combined buildings and contents policy rose 8.0 per cent to £275

Shoparound Index (an average of the lowest three quotes for each 'customer' in the basket of risks:

  • Shoparound buildings insurance premium rose by 5.0 per cent to £125
  • Contents rose by 5.2 per cent to £65
  • Combined buildings and contents rose by 4.8 per cent to £184

NEW: Aggregator findings

  • Average quoted premium for buildings rose by 1.1 per cent to £161, contents1 fell by 14.8 per cent to £105 and combined1 fell by 7.7 per cent to £232
  • Average Shoparound premium increased for buildings by 3.6 per cent to £110, contents1 fell by 18.7 per cent to £66 and combined fell by 10.4 per cent to £159

1Contents and combined premiums have been influenced by a number of insurers no longer including legal expenses in their quote.

Annual movements:

  • Average quoted premium for buildings rose by 10.5 per cent, contents rose by 7.7 per cent and combined rose by 10.8 per cent
  • The Shoparound premium for buildings rose by 11.5 per cent, contents rose by 4.4 per cent and combined rose by 9.2%

Despite continuing premium rises for buildings cover, and a reverse in the falling trend in the cost of contents cover, home insurance continues to represent exceptional value for money and has not been as volatile as the motor market.

However, the cost of buildings insurance has seen a steady increase throughout 2009, amounting to 10.5 percent over the year for the average quoted premium.

Comment

Simon Douglas, director of AA Insurance, says: "This steady rise reflects both the rising cost of repairing buildings and the increasing frequency of claims.

"2009 saw a number of extraordinary, although often localised, severe weather claims which has included surface water flooding, often in places with no history of flooding, as well as flooding from swollen rivers.

"The year began with heavy snowfalls. Later there were storms producing property-damaging hailstones the size of golf balls; high winds and even tornadoes which have been ripping off roof tiles, demolishing chimneys and bringing trees down on buildings. The year closed with the Carlisle flooding disaster and heavy snow again – all of which ultimately feeds in to premiums.

"The industry is acutely aware of the risk associated with climate change and needs to build reserves to meet the seemingly increasing frequency of extreme weather events."

Douglas point out, however, that the cost of buildings cover is still only 24.3 per cent higher than when the Index was first launched in 1994 although most of that gain has happened over the past 18 months.

Contents insurance, however, has until the last quarter of 2009 bucked the premium trend, falling to below its 1994 value. But following a slight increase over the third quarter, the last three months of 2009 saw the sharpest rise in average quoted premiums since the Index began, wiping out the falls of the previous 18 months. Part of this increase is due to a 50% discount offer from one insurer that was available in September but has since been withdrawn.

"We have yet to see whether this is the start of an upward trend," Douglas says. "Average premiums for contents cover have remained low thanks to heavy discounting, despite increasing cost and frequency of claims during the recession. I think we are seeing the industry correcting this anomaly."

Combined buildings and contents cover showed a steeper increase than either buildings or contents, with a quarterly rise of 8.0 per cent. "This suggests that it is sometimes more cost effective for buyers to source their home and contents cover from different providers," Douglas suggests.

The Shoparound increases have been less than the market average, which indicates that there are still deals to be had for those prepared to shop around for their cover, or use a broker such as the AA to find their cover for them.

Join the discussion in the AA zone

 

27 January 2010