Why is my car insurance so expensive

It’s no secret that the cost of car insurance has been going up year after year. Despite the fact that many of us pay thousands of pounds in car insurance without ever making a claim, the insurance industry regularly makes a loss. In fact, 2017 was the first year the industry saw profits since 1994. So if the prices keep going up, but the industry rarely makes a profit, where does it all go?

The insured pay for the uninsured

For years now honest law-abiding people have been paying for more their insurance purely to cover the cost of those who illegally drive uninsured. A shocking one million people are estimated to drive without insurance in the UK. If one of those drivers gets into an incident, the insurance company of the person who is insured has to cover the cost – regardless of who was right or wrong in the situation.

With an estimated 27,000 people injured in the UK due to accidents with uninsured drivers each year, the rest of us are having to chip in a hefty amount to cover the cost – with the average insurance policyholder paying £30 more on an annual policy just to account for uninsured drivers alone.

Fraud

Similar to the industry’s problem with uninsured drivers driving up costs, fraudulent claims are also a serious issue affecting everyone’s premiums. Covering the cost of fraudulent claims for personal injuries such as whiplash (for which there are no real verifiable physical symptoms), are adding even more to your insurance policy than uninsured drivers. It is believed that a whopping £90 is added to the average insurance premium to cover the cost of payouts due to whiplash alone.

Of course, many of these personal injury claims will be genuine, but a sizeable number of dishonest claims have been made each year. Luckily, the law has recently been changed so that insurers have an easier time investigating those they believe to be falsely claiming a personal injury on their insurance policy, so the number of fraudulent claims is set to decrease.

Greater payouts for serious injuries

The Ogden discount rate is used by insurance companies to calculate how much to payout in the case that someone has a life-changing injury. In 2017 the figure moved 3.25%, from 2.5% to -0.75% – effectively increasing the amount that people are paid when making a claim for serious injuries. Of course, as we’ve seen in the cases of uninsured drivers and personal injury frauds, when the industry is forced to pay out more money, it is the policyholder who takes the hit by being charged more.

Short term car insurance

The number of people owning a car has been declining in recent years. This fact coupled with the cost of annual insurance policies rising has made car sharing much more popular. People are getting hold of a car on the rare occasion that they really need one, and are thus opting for short term insurance policies – with some companies even providing cover for just a few hours.

Insurance Premium Tax (IPT)

VAT doesn’t apply to insurance. Something called the insurance premium tax (IPT) is charged by insurance companies instead. The IPT is set by the government and has been slowly rising – doubling from 2011 to 2017 (6% to 12%). IPT is set to increase, so don’t expect your insurance premiums to fall in price anytime soon.

Making up for losses

A large number of insurers will actually make a loss on the initial policy they sign you up to in the hopes that they can make back the money when you renew your policy (by raising the price on renewal). In this particular situation, your insurance premium is going up purely because the price you were charged the year before was unsustainable.

Middle men

In recent years there have been an increasing number in the middle stages between the customer (the insurance policyholder) and the underwriter (the insurer who pays out in the instance that a claim is made). With price comparison sites, software companies and brokers now lining the path between the customer and underwriter, prices have been going up as everyone needs to get paid. However, overall the sharper ones amongst you can take advantage of price comparison sites to compare insurance policies and get a better deal than you would have currently gotten – so it’s not all bad…

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