Q&A: The cost of car insurance

UK drivers may have to pay up to a quarter more for their car insurance in the coming year, experts predict. BBC News Online takes a closer look at the reasons for rising premiums.

Why is car insurance getting ever more expensive?

There are a number of reasons why insurers say they need to raise premiums.

Firstly, more people are taking insurance companies to court and payouts are getting higher.

Many other costs are rising as well.

Cars may be getting cheaper, but more sophisticiated design means that they can be more expensive to repair. Insurers pay £3bn a year for components and spend another £3bn on car repairs.

Fraud is also an issue. Direct Line estimates that one in 20 drivers is uninsured and this is reflected in high premiums.

Overall, car insurers are finding it more difficult to make a profit.

Last year, the motor insurance industry lost £1.3bn as a whole. Direct Line calculates that for every £100 motor insurers picked up in premiums, they paid out £120.

Insurers' profits are premiums (plus the money made by investing the premiums) minus the cost of expenses and claims, so even for profits to remain the same, premiums have to rise.

Is the UK market competitive?

There is fierce competition for customers, who are more likely to change their car insurer than they are switching to another household insurance provider.

The arrival of direct insurance providers, such as Direct Line, in the 1990s, shook up the sector. Many insurers cut premiums in order to compete with the new entrants, but their costs remained high, hence they started to make losses.

Some, such as Drake Insurance, even went out of business.

Now, they are finding it necessary to increase premiums so they can stay in business.

Is car insurance more expensive in the UK than in Europe?

In the UK, many more drivers take out comprehensive insurance than in Europe. This means that often they are paying more motor insurance than their European counterparts.

It is difficult to compare policies between countries, and unclear wheather premium rates in Europe are much cheaper than here. Experts say the UK market is comparitively competitive, and as such it is unlikely that consumers are being ripped off.

Will the cost of car insurance continue to rise?

Car insurance premiums are expected to rise in the short to medium term.

Datamonitor questions whether the heady competitiveness and lower premiums of the early 1990s will be seen again.

But some believe that in the longer term, premiums will fall as more insurers cut their cost by selling on the internet and selling on the phone.

It is unlikely that all insurers will have to increase their rates as some of them have managed to remain profitable, so consumers who shop around should still be able to find good deals.