Why your car insurance has shot up by £45

CAR insurance premiums have risen to £485 a year on average thanks to a combination of tax hikes and new compensation rules.

This is an increase of £45 in just 12 months, according to the Association of British Insurers (ABI).

Young and elderly drivers are likely to have been hit particularly hard as they tend to pay the highest costs.

The rise is likely to stoke fresh fears of a spike in illegal drivers as those who struggle to pay decide not to take out insurance at all. Insurance premium tax has doubled to 12 per cent in the past two years, opening the Treasury up to claims it is squeezing consumers by stealth.

Drivers have also been punished by rules governing pay- outs to victims of serious accidents. A formula used to determine how much insurers must hand over was tweaked in February to reflect record low interest rates. The change massively boosted the amount of compensation which must be given to victims – with insurers left to foot the bill – and much of the cost has been passed on to drivers.

Insurance lobbyists have been pushing hard for a rethink, and ministers have pledged to find a compromise.

Rob Cummings, of the ABI, said: ‘The UK Government’s proposals to deliver a personal injury compensation system that is fair for claimants, customers and taxpayers alike should help ease the pressure on motor insurance premiums.

‘We urge the Government to publish a framework and timetable for making these reforms a reality so that we have in place a system that provides full compensation to claimants and benefits insurance customers, as well as other compensators like the NHS. And in the forthcoming Budget, the Chancellor must resist any temptation to further increase the rate of insurance premium tax.’

ABI’s concerns have been echoed by major businesses in the industry. In August, the boss of insurer RSA, Stephen Hester, blamed vulture lawyers pursuing fraudulent whiplash claims for pushing up premiums.