Why is car insurance so expensive?

Find out why car insurance premiums are so expensive

By Anita Shargall Monday 22 January 2018

There are lots of reasons why car insurance can be expensive – find out more about them here…

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Car insurance premiums are now at a level where they can take a big bite out of a motorist’s budget. So why is car insurance so expensive?

The cost of car insurance is high for the simple reason that the cost of claims is high. Insurers therefore increase premiums to protect their coffers – and many of them say that they make little or no profit out of motor insurance business.

Unfortunately, many car insurance claims are fraudulent and it is honest motorists who end up paying the (hiked) price.

The cost of fraud

According to statistics from the ABI (Association of British Insurers), the insurance industry detected 125,000 cases of fraudulent claims in 2016, worth a staggering £1.3 billion. Or to put it another way, insurers thwart around 2,400 fraudulent claims - valued at £25 million - each and every week.

Somewhat hopefully, the number of cases is down from previous years thanks to the Insurance Fraud Register (IFR). Launched in 2013, it holds details of known fraudsters in an attempt to combat the problem.

This register both complements and collates the work of the Insurance Fraud Bureau in detecting fraudulent claims, and the Insurance Fraud Enforcement Department, which prosecutes fraudsters.

"Every week insurers stop fraudulent claims worth £25 million.."

And while home insurance frauds are the most common, dishonest car insurance claims are the most expensive, largely due to claims for ‘crash for cash’ whiplash injuries.

Whiplash claims

Whiplash claims are a particular problem for insurers, as there are about 1,500 whiplash claims every day in the UK – an increase of around 50% in a decade. These claims cost the industry approximately £2 billion a year, adding a rather hefty £90 to every driver’s annual car insurance premium.

And because whiplash is notoriously difficult to diagnose – due to this type of injury not showing up on X-rays or scans – it’s almost impossible to disprove. This exposes the system to exploitation and abuse.

However, the Ministry of Justice has suggested putting a cap on the often-exorbitant rewards for whiplash claims in England and Wales, which could save the insurance industry millions of pounds. The suggested cap would be a maximum compensation of £425, down from the average of around £1850.  

Plus, it has also been made easier for insurance companies to challenge a claim for whiplash injury, with the idea that less fraudulent claims will be made generally. Independent medical panels could, in future, assess the validity of whiplash cases in a bid to stamp out fraudsters, and it will also be easier to challenge whiplash claims in the small claims court.

Ban on referral fees

The government also plans to ban referral fees in personal injury claims. At the moment, details are often sold on by car insurance companies to personal injury lawyers, which lead to the increase in compensation claims.

There was a 60% rise in personal injury claims relating to road accidents between 2006 and 2012, according to the then government. This might come as a surprise as our roads are supposedly getting safer, when you take into account the 20% fall in reported accidents in the same period.

Not only that, the government plans to cap the amount solicitors can charge in fees for road traffic accident cases to £500 (or £750 for claims over £12,000). This will hopefully curb the nuisance calls too, as there will be less incentive for the lawyers generally.

It’s hoped that the ban will curtail some of the excesses of our compensation culture and lead to a fall in premiums.

Uninsured motorists

The insurance industry is not only fighting fraudsters, it’s also battling uninsured drivers. There are more than one million uninsured motorists on Britain’s roads, and they too cost us dearly.

If you drive without car insurance, you don’t pay any premium, but the insurance industry still has to cover the cost of any injury or damage to another person or car in the event of an accident. Uninsured drivers add an estimated £30 to the average car insurance premium.

Not to mention an estimated 130 people are killed on the road and another 27,000 are injured every year by uninsured or untraceable drivers, according to research from insurance company Churchill.

Insurance enforcement

In 2011, the government introduced legislation to crack down on uninsured motorists, known as Continuous Insurance Enforcement (CIE). Basically, if you’re the registered keeper of a vehicle – the person responsible for taxing the car – you must make sure it’s insured at all times, even if it’s kept in the garage.

The only way to be legally uninsured is to declare the car off the road with a Statutory off Road Notification (SORN) from the DVLA.

The penalties for flouting the rules can be harsh. You could be issued with a fixed penalty of £100 and your vehicle could be wheel-clamped, impounded or even destroyed. In the most serious cases, you could face prosecution and a maximum fine of £1,000.

Dishonest drivers push up car insurance premiums for everyone, but some motorists still pay a higher price for cover than others. It’s all down to the risk they pose to the insurer.

Gendered insurance

Even though women are considered safer drivers than men, insurers are no longer allowed take gender into account when they set car insurance premiums, following a ruling by the European Court of Justice.

However, generally speaking, due to the less powerful cars that women usually drive and the shorter amount of time spent on the road, women can still get marginally cheaper insurance premiums, on average.

Car insurance for young drivers

Car insurance companies can still charge different premiums according to age, though, and car insurance for young drivers is 18% more expensive than for older motorists. This is due the fact that they are more likely to put in a claim.

Statistically, one in five drivers has an accident in the first year of driving and about a quarter of road accidents involve a driver between the ages of 17 and 24.

In other words, young drivers are risky so it’s perhaps no surprise that they can pay more than double the average car insurance premium. In fact, the cost of a policy often runs into the thousands: the average fully comprehensive policy cost young people £1,242 in December 2017*.

Risky occupations

Your occupation can also push up the cost of car insurance cover as some jobs are considered more risky than others. A stuntman, for example, will pay more for car insurance than an accountant.

If you drive your car for business purposes, you should always inform your insurer. Standard motor insurance covers social, domestic and pleasure use only, perhaps embracing a regular commute to the train station or place of work. But, if you drive your car as part of your job, you will need a specialist policy, or the insurer could legitimately refuse to pay any claims you make.

Postcode problems

Insurers take a number of risk factors into account when determining premiums. Even your postcode can affect your premium, as cars in some areas are more vulnerable to theft and vandalism than others.

Insurance premiums in inner city areas considered a high risk are often much more expensive than in more rural locations because crime rates are higher. It may seem unfair to be charged more for living in a city, but insurance premiums are always factored on risk.

Even within the same city a postcode change can decrease or increase your annual premium – it all depends on the crime rates. And if an area sees a decline in crime, you’re likely to carry on paying higher premiums because insurers are slow to update their records.

Car insurance groups

Insurance companies classify all cars built to UK specifications into one of 50 car insurance groups – and the higher the insurance group, the higher the premium.

The ratings are decided according to information on the likely cost of any claim, including the time and cost of repairs, the value of the car when new, the performance of the car and the standard safety features on the vehicle. 

Plus, any modifications to the car can add extra cost to your premium, for example, having a full body kit will increase your premium by 13%.

If you’re buying a car, it’s a good idea to first check out which group it has been assigned to. You can read more about this on our guide to car insurance groups.

Cutting the cost

There are several ways to cut the cost of car insurance. For example, if you compare cheap car insurance quotes at renewal using MoneySuperMarket’s free independent comparison service you could knock hundreds of pounds off your premium.

Careful drivers can also build up a no-claims discount, or what about a telematics insurance policy?

You can find out more money savings tips on our page.

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