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Car insurance premiums jump by a third in three years

Find out why car insurance premiums have soared since 2015

UK drivers paid a third more for their car insurance in 2018 than three years ago, largely due to a government policy changes, according to a new report from comparethemarket.com.

The figures show that changes to Insurance Premium Tax and the Personal Injury Discount Rate have added an extra £208 to the average cost of car insurance from 2015 to last year - around £7.8bn across the whole market.

Here, we take a look atwhy car insurance has risen over the years and how to find the best car insurance policy at a suitable price.

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Car insurance on the rise

Over the past three years, car owners are paying 33% more for their car insurance than they were previously, new data from comparethemarket.com has shown.

In 2015, the average car insurance policy was £551 a year. By contrast, motorists paid an average of £735 in 2018.

The costs took a toll on car owners, especially younger drivers who already face higher premiums.

Over half (56%) of young drivers agree that the cost of running a car is difficult for them. And 49% said that they received financial assistance from someone else to help with cost of running their car.

  • Find out more: car insurance explained

Why have car insurance premiums increased?

The dramatic rise in the cost of car insurance can be traced back to two government changes: an increase in Insurance Premium tax (IPT) and a change to the Discount Rate.

Insurance Premium Tax

IPT is a tax levied on insurance companies by the government, but the companies factor it into the prices paid by customers. This means that if the cost of IPT increases, so will the cost of your car insurance.

There are two types of IPT:

  • Standard rate, which applies to general insurance policies like car insurance, home insurance and pet insurance.
  • Higher rate, which applies to travel insurance, mechanical insurance and electrical appliances insurance.

IPT has been around for decades, but since October 2015, the standard rate has risen four times, doubling from 6% to 12%. As a result, premiums have shot up.

The table below shows historical IPT rates.

RatesFrom 1June 20171 Oct 2016 to
31 May 2017
1 Nov 2015 to 30 Sep 20164 Jan 2011 to 31 Oct 2015Up to 3 Jan 2011
Standard rate12%10%8.5%6%5%
Higher rate20%20%20%20%17.5%

The Discount Rate

The other factor driving prices rises could be the Discount Rate, also referred to as the 'Ogden Rate'.

This is used by courts to decide how much insurance companies have to pay out in compensation for personal injury claims. The courts assume the claimant will invest the lump sum, and earn a return from it; this rate of return is deducted from the amount the insurer is ordered to pay.

However, in March 2017, the government decreased the Discount Rate to -0.75% - down from 2.5%. This essentially meant that the lump sum payout for a personal injury claim would be increased rather than discounted, which led to a sharp rise in the amount of compensation that insurers had to pay.

This initially caused a spike in car insurance prices, but as insurers began to recover from the shock, car insurance premiums levelled out again.

Are car insurance premiums falling again?

While premiums continued to rise last year, the tide may be starting to turn.

In December 2018 the government passed the Civil Liability Act which, which significantly changed the way claims for whiplash are calculated.

Under the new rules, the definition of whiplash has been tightened and injuries lasting up to two years will be compensated under a set tariff. This is expected to decrease the compensation paid out by insurance companies.

The Ministry of Justice (MoJ) said that the changes aimed to make personal injuries' claims fairer, so that while people who are injured receive 'full and fair compensation,' insurers are spared the 'pressure of meeting excessive compensation' claims.

Although these changes won't come into force until April 2020, some insurers have started to pass the anticipated lower costs onto drivers. Which? reported in April that since the Civil Liability Act was passed, premiums fell from £790 in December 2018 to £690 in February 2019.

While this may signal a long-term decrease in the cost of car insurance, there are other factors at play.

A decline in the number of car registrations earlier this year could be forcing insurers to make their pricing more competitive as the market shrinks.

In December 2018 for example, the number of car registrations fell 5.5% year compared with the same time the year before. A similar trend was seen in January and February 2019, when car registrations fell by 1.6% and 0.6% respectively, according to data from The Society of Motor and Traders (SMMT).

How to find cheap car insurance

Finding competitively priced car insurance that suits your needs can be tricky. There are, however, a number of ways to get the best policy for your motor.

First, while price is an important factor, don't just settle on the cheapest option. Make sure you read the terms and conditions of any policy carefully to check it covers everything you need.

Buying a car insurance policy that doesn't give you enough cover will end up costing you more in the long run, especially if you have to make a claim and find out you're not covered for the damage.

The time of year that you buy car insurance can also have a big impact on the price you pay.

Research shows that February is thecheapest month for car insurance, while December is themost expensive month.

To help you find the best insurer, we've combined expert analysis of more than 30 standard car insurance policies along with feedback from thousands of policyholders to produce independentcar insurance reviews.

For more tips and information, check out our car insurance advice guide.