Why has car insurance increased? How used car costs and new regulations are driving up prices

First there were utility bills, then the mortgage. If you’re a driver, a third wave has hit your finances: car insurance.

The average price of a car policy has risen by a whopping 61 per cent over the past year, from £900 to £1,449, according to pricing expert Consumer Intelligence. For people in higher risk categories, such as young and old people, the rise has seen premiums rise to more than £3,000 in some cases.

The reasons for the price increase are different. First, and most obviously, the cost of damage has increased. Just as food prices have risen, so have auto parts and mechanical costs—not to mention the day-to-day costs of running an insurance company.

Used car prices also increased as high new car prices increased demand for used cars. This means insurers have to pay more if cars are stolen or written off.

But other, less obvious factors also play a role here. First, new rules introduced last year that prevent insurers from charging existing customers more than new ones have put pressure on insurers’ profits.

Several major insurers, including Royal Sun Alliance and Zurich, have pulled out of the UK’s main car insurance market entirely. And this reduction in competition has also made it easier for the companies remaining in the market to raise prices more.

But it’s not just rising prices that are causing headaches for customers in the auto insurance market. The market has also seen an explosion of new sub-brands, a practice known as “brand stacking.” For example, Hastings now offers offerings under the Hastings Premier, Hastings Direct and Hastings Essentials brands. In addition to the core brand, Admiral now also offers the Admiral Gold and Admiral Platinum brands.

In my opinion, this is a direct result of the ban on offering different prices to new and existing customers. In the past, insurers made most of their profits by overcharging their slow-moving, loyal customers while remaining competitive on new contract rates for switchers.

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However, these days this is prohibited. So when customers call and ask their insurer to tighten their offer, they are instead offered savings by switching to another sub-brand.

The problem is that the consumer is blinded by their choices – and many will find it difficult to understand the differences between different levels of policy.

Twenty years ago, there were practically only two main types of car insurance: comprehensive and liability insurance, fire and theft insurance. To compete on price, brands are now downsizing their products, with some new key rules missing elements that were previously nearly universal.

For example, Hastings Essential does not cover damage to your windshield, your car’s audio-visual equipment, or a no-claims discount if you are hit by an uninsured driver.

To be fair to Hastings, they document these exceptions in their customer journey. However, these are not necessarily things that customers don’t realize the value of until they have to make a claim for them.

There is also no similarity between the basic, standard and premium levels of insurance that most insurers offer. For example, Axa’s core policy still covers windshields. However, it does not cover lost or stolen car keys and does not provide a replacement car if your car is garaged after an accident – two things Hastings Essential offers.

The combination of rising prices, product misrepresentations and brand glut is creating a perfect storm that will inevitably lead to more bad purchases from consumers. This means that more and more people are buying policies that don’t meet their needs – just so they can continue to afford auto insurance.

It is certainly time to limit the way insurers set their prices and set some minimum standards for the coverage offered. In the latter case, customers should be able to create their own feature package and receive guidance to make the right decisions. And if someone decides to describe their coverage as comprehensive, perhaps there should be a minimum coverage requirement so that people can be confident that policies with that designation actually live up to their name.

When it comes to prices, we have to consider that more and more people can no longer afford insurance at all. Often the poorest customers receive the highest prices. This may be because they live in higher risk areas, but risk pooling here certainly needs to work a little harder. Alternatively, it might be time to look at the welfare level for the industry – or the premium tax exemption for low-income customers.

What can you do now if your insurance renewal offer is not available? As always, use comparison sites to get the full range of offers. Don’t wait until the last minute because you will always get a better deal. Check to see if there are different ways to classify your profession. For example, a stay-at-home parent is mentioned less often than someone who describes themselves as unemployed. Add a second driver to your policy.

And if you can avoid monthly payments, it’s almost always cheaper to pay the entire amount up front. If your credit is good enough, get a 0 percent interest credit card and use it to get insurance. Then enter it into the drawing and pay it off within a year.

However, when choosing insurance, take special care to understand what you are buying and what you are not buying. There’s a minefield there. Be careful.

James Daly is director of consumer group Fairer Finance