£1k to insure car

Tax rises and pay-out reform to raise bills

CAR insurance bills could soar above £1,000 next year due to stealth taxes and controversial compensation reforms, according to a report.

The cost of the average motor insurance policy is already £110 higher today than it was a year ago, rising 16 per cent to £781.

This has been driven by a flood of bogus whiplash claims, rising repair costs and successive tax increases. But experts have warned a combination of further increases in Insurance Premium Tax and reforms to injury pay-outs will cause premiums to spiral.

Average premiums for comprehensive cover are on course to smash the 2011 record of £858 later this year, and could break the £1,000 barrier next year, according to analysis by comparison website Confused.com.

Worst hit will be male drivers aged 17 to 20, who have already seen their premiums rise £213 over the last year to £2,363. Premiums are expected to pick up when the Government raises Insurance Premium Tax – panned as a stealth tax on households – from 10 per cent to 12 per cent in June.

This will affect around 36million general insurance policies – including car, home and medical cover – with insurers paying for the tax rise by hiking their premiums.

But insurers are warning that reforms to the way compensation for serious personal injury payouts are calculated is going to push premiums up even further.

Courts calculate compensation based on loss of earnings and the cost of care. But they also work out how much pay-outs should be adjusted based on the likely interest victims would earn.

This rate had been set at 2.5 per cent. But last month it fell to -0.75 per cent. It means insurers will pay more on the assumption victims will lose money.

Insurers warned it would lead to spiralling premiums for millions, prompting Justice Secretary Liz Truss to promise an urgent review of the legislation.

Last month the Office for Budget Responsibility warned drivers face a total £2billion rise. The prospect will be particularly alarming for those who have seen the biggest hikes in the last year. They include those in Manchester and Merseyside, where average premiums rose £38 in the last three months.

Accountants PwC predicted the change will add £50 to £75 to the average policy, with younger drivers facing a rise of up to £1,000 and over-65s of up to £300.

Last night Rob Cummings, of the Association of British Insurers, said: ‘Motorists are being hit by a cocktail of rising costs ... Recent changes to the Discount Rate, that will massively increase injury claims costs, are now being felt too. It is therefore vital the Gov-

‘Hit by cocktail of rising costs’

ernment legislate for a new way of setting the Discount Rate.’

But Guy Anker, of MoneySavingExpert, said: ‘Given insurance companies almost always overcharge existing customers by hiking premiums at renewal, you wonder whether some may use the new discount rate as an excuse to increase the price of policies.’

The Treasury said: ‘Insurance Premium Tax is a tax on insurers, not consumers, and it is up to the insurers whether or not they choose to pass it on. It only applies to 20 per cent of all premiums. If insurers do decide to pass on the charge, the industry’s own analysis states motor insurance would increase by just 16p per week.’