Car insurance premiums: why you're paying more than ever for cover

Drivers of all ages are paying record amounts in car insurance premiums. And the Association of British Insurers (ABI) has warned there is no end in sight for the high cost of cover.

The reason for these spiralling prices is a cocktail of external factors. Here we look at why the cost of cover is going up, show where premiums are spent, and point the way to how drivers can save money on their motor insurance.

What's the average price of UK car insurance?

According to the ABI's latest figures, all age groups over 21 have experienced rising costs over the last 12 months. While younger drivers' premiums are being kept under control by the increasing use of telematics, they're in the minority. Drivers in their late 50s and late 80s faced the highest rises last year - nearly £35 per annum. The average annual premium is now £462. That's up by £33 or 8 per cent compared with the same period last year.

However, independent price comparison company Confused.com says the cost is greater still. It has been tracking the average cost of insurance for every quarter since 2006. In 2017, it says drivers have faced average car insurance bills of £781 a year. Confused.com claims that's a rise of £110, or 16 per cent on the previous year.

Why is car insurance so expensive?

Insurers have found themselves hit by a triple whammy of influencing factors. First is the compensation culture and bogus personal injury claims. In 2015, the ABI says there were 69,000 fraudulent motor claims made, costing £780 million.

The second area to have an impact on insurance costs is the complexity of modern cars. Increasingly sophisticated electronics require specialist equipment and training to be fitted and calibrated. Even simple body panel parts are becoming more expensive due to the weak pound. Over the last three years, the average repair bill has risen by 32 per cent, to £1678, according to the ABI.

Last but definitely not least is the increase in insurance premium tax. Until 2015, it was 6 per cent. But it has been steadily increased by the government to 10 per cent. It will go up again, to 12 per cent, this June.

What are car insurance premiums spent on?

The Association of British Insurers produced the graphic above to show how drivers' premiums are spent by insurers. The ABI also points out that Insurance Premium Tax is on top of this.

Is there light at the end of the tunnel?

If only there was. Earlier in the year, the government introduced reforms to put the brakes on whiplash claims. This was expected to lower car insurance premiums by an average of £40.

However, changes to personal injury compensation rules could negate that. Previously, courts took 2.5 per cent off any compensation pay out awarded to individuals. It was done to reflect the interest a victim will earn on the lump sum when they put it in the bank.

But after late March, the rate was changed to minus 0.75 per cent. This was to reflect the fact that interest rates are so low for consumers.

However, it means insurers could end up raising prices by an average of £75 a year, according to Price Waterhouse Coopers, the accountancy firm. And the ABI has described the decision as 'crazy'. ABI director general Huw Evans said: "With inflation on the rise, motor premiums at a record high and the public purse under pressure, it's concerning that the government has yet to commit to delivering a fairer system for setting the personal injury discount rate. We're pleased the government is going to bring forward a Civil Liability Bill to reform whiplash style personal injury compensation. But the benefits could be wiped out if they don't defuse the discount rate bomb."

How can drivers reduce their insurance costs?

Read our guide to cutting the cost of car insurance premiums.  This offers advice on areas including shopping around, picking a car with a competitive insurance rating and keeping the car garaged.