Its a classic supply and demand cycle, as you rightly noted the returns on their investments reduce which hits their profits, it also reduceds their solvency levels so they have to either shore their solvency up or more normally accept less business but at a higher premium.

In a hard cycle some Insurers will withdraw from the market which further effects prices, however as the prices get back upto a level where they are profitably again then as with any supply and demand Insurers tend to return and eventually the prices soften (Reduce).

As Huckster has pointed out there are a number of other factors that all contribute to the hardening of rates many of them are linked to to the recession. The other factor that has an effect on the premiums (Not neccessarily a massive effect) is that during a recession as well as an increase in fraudulent / exaggerated claims there is normally an increase in the crime rate so there is an increase in claims on policies. This can also be affected by people claiming for the thefts when they might have shouldered the cost themselves when we were not in a recession.

Premiums on Motor Insurance are currently artificially low thanks to the highly competitive nature of the UK Motor Insurance market which is caused by the over supply of car insurance and the effect of the internet / comparision sites meaning Insurers have to offer the best price (Often at a loss) to gain new customers. A correction in prices was inevitable but has been hastened by the recession

I remember the last Hard Market (After 9/11) when for instance premiums for nightclubs (All but one Insurer pulled out of the market) increased to four times the price pre 9/11.

Hi Dacouch,

That makes sense, I suppose, since a lot of insurance revenue comes from investing the premiums. How long do you think these cycles are? Do you feel up to predicting a softening?

Felicity

Insurance goes in cycles of Hard and Soft rates, recessions almost always result in Insurance premiums increasing for many reasons. We are in a recession and rates are going up, we are leaving a prolonged period of soft rates and the premiums are hardening

Ha ha, thanks. If this could be where you reveal you're the online personna of Mark Thompson, that'd be ace *grins*

Regarding uninsured drivers, it's such a provocative issue. You say we 'might reach' a point where people aren't buying insurance, but it seems to me that we are already there to an extent.

The ABI says one in 20 cars on the road has no cover, the new research from the Motor Insurance Bureau says that rises to one in five when it comes to drivers aged 20 or younger.

Another issue we touched on in the podcast, but didn't go into too deeply is people trying to drop their insurance costs by concealing some information. That could be a much more widespread issue and is a real concern as they are, in effect, uninsured drivers!

Still, Admiral recently made a profit from its car insurance, so maybe there's some hope things are starting to level out...?

Felicity

Felicity

I had read somewhere that Car Insurance has been a loss making business overall since about 1997. I think this was in a report produced by the FSA sometime ago.

The main reasons for increase in average premiums are.

1) Personal injury settlements and associated legal costs.

2) Fraudulent claims including staged accidents.

3) Cars are more expensive to repair as parts and labour costs have increased.

4) There are more accident specialist companies eg Drive assist, who will add their costs if involved. You will have read that such companies can often drive up the cost of claims.

5) More people have driving convictions due to all the extra speed cameras, so insurers increase premiums.

6) Society issues. Less public transport in some areas, so more short journeys and more people wanting to have their own transport for work/social needs.

7) Uninsured drivers and lack of enforcement.

Premiums will continue to rise and of course people should shop around, providing accurate details. However, at some point we might reach the position where average premums have risen to such a level that uninsured driving becomes a major issue .The government would then have to step in to come up with another solution eg. 3rd party cover with vehicle tax.

I did listen to your podcast. You certainly have a trained 'radio voice', very clear pronunciation. A career in radio journalism with the beeb the next step, I think!

Huckster

Hello,

In the latest episode of Cashing In (our monthly podcast), I've been trying to find out why car insurance premiums are rising. The cost of car cover is now rising at its fastest rate for ten years.

I spoke to the AA, the ABI and moneysupermarket.com's own expert Steve Sweeney. Now I want to know what you think. How can we get car insurance costs under control? Are people lying about their personal injuries? Should the police be doing more to catch uninsured drivers before they get involved in accidents?

Looking forward to your thoughts,

Felicity