AA Quarterly Insurance Premium Index

Car insurance set for steep rise / Home insurance still good value

28 April 2009

Car insurance

The average quoted premium for an annual comprehensive car insurance policy rose by more than 1 per cent over the first quarter of 2009, according to the AA's latest benchmark British Insurance Premium Index.

This is the first time for several years that there has been a first-quarter increase in car insurance premiums.

The average quoted premium, based on data from over 80 insurance providers on a basket of 1,000 'customers', rose by 1.3 per cent to £751.60. The Shoparound index, an average of lowest three premiums for each 'customer' and is closer to the premium most people will pay, rose by just under 1 per cent to £504.38.

Addressing past underwriting losses

Simon Douglas, director of AA Car Insurance, says: "Although 1.3 per cent may not sound much, premiums fell during the same period in each of the past five years, so this increase is a significant indication that insurers are determined to address past underwriting losses this year, as we predicted last year.

"Premiums tend to fall a little during the first three months of the year. It's when most car insurance renewals take place while the new March car registration change prompts customers to look for new insurance cover, so competition between insurers tends to hold premiums in check.

"But the industry is facing escalating costs, falling investment income and underwriting losses. Premium rises are therefore inevitable."

Simon Douglas points out that theft, fraud, personal injury claims and legal expenses are all contributing to increasing costs.

Cheats add £40

"Figures issued by the Association of British Insurers show that the value of detected fraud rose by 30 per cent last year. Insurance cheats add an estimated extra £40 to the average car insurance premium paid by honest motorists.1

Theft claims up

"In addition, theft claims for modern expensive cars, where thieves first steal the keys by either robbery or burglary, rose by 15 per cent2 over the six months to April, compared with the same period last year.

"Personal injury claims and their associated legal costs also continue to rise, especially as the recession takes hold."

Mr Douglas believes that for every £100 in premiums received by motor insurers; around £1053 is paid out in claims. He adds that the economic downturn has also contributed to reduced investment income and depleted reserves from which insurers pay claims.

"Over the past 12 months, the average quoted premium for comprehensive car insurance rose by nearly 11 per cent. I expect premiums to increase by at least a similar percentage over the rest of 2009." he adds. "However, brokers such as AA Insurance are well placed to find the most competitive deals."


Pdf version including Tables »

Home Insurance

The first quarter of 2009 saw the average quoted premium for an annual buildings insurance policy rise for the eighth successive quarter, adding a further 50p and taking it to a new high of £218.53, according to the AA's benchmark British Insurance Premium Index.

Over the past year, the average cost of building cover has leaped by 8.0 per cent – the biggest annual jump since the Index started in 1994.

The average quoted premium for a home contents insurance policy rose more sharply, by over £3.00 to £126.34, reversing the downward trend of the previous six months.

The cost of a combined home and contents policy also rose slightly, to an average of £292.54.

The Index is calculated by averaging premiums quoted from 75 insurance providers on a basket of 750 'customers'.

Shoparound index

The Shoparound index, an average of the lowest three quotes for each 'customer', featured sharp rises for buildings, contents and combined home insurance policies. This suggests that there are fewer cheap deals available. Nevertheless, despite the rises home insurance continues to offer good value with premiums having risen by only a few pounds since the Index started in 1994.

Simon Douglas, director of AA Home Insurance, points out that historically, home insurance has not made the underwriting losses that have been a feature of the car insurance sector.

Rebuilding costs are rising

"However, this is changing: even though house prices have been falling, the cost of rebuilding and repairing homes to the higher standards required by building regulations, has been steadily rising.

"Also, the recent harsh winter brought an upsurge in claims for buildings damaged by snow and ice while the legacy of the 2007 floods remains."

Contents premiums

While the relative cost of buildings cover has risen significantly since July 2008, contents premiums have been falling. "Although contents cover remains competitive the average quoted premium has risen by nearly 1 per cent per month over the past quarter, which is an unusually sharp increase," Mr Douglas says.

Fraud thrives during times of recession

"Part of the reason is a record rise in the number of fraudulent claims made. Last year, the industry detected 55,0001 false or exaggerated contents insurance claims. Fraud thrives during times of recession and the inevitable result is an increase in premiums although the insurance industry is working hard to limit the impact of fraud on the cost of insurance for honest householders.

"Rather than rely on their mortgage providers home owners are increasingly likely to shop around for cover. Despite the upward premium trend, there are still good insurance deals to be done and brokers such as AA Insurance are well placed to offer them."

Factfile


Pdf version including Tables »

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 81 insurers, brokers and insurance schemes and a basket of 750 risks for each of home buildings, contents and combined from 75 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.

1Source: Association of British Insurers
2Source: AA Insurance claims data: 6 months ending 31 March 2009 compared with 6 months ending 31 March 2008
3Estimate confirmed by Association of British Insurers

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