Why has car insurance gone up?

Last updated March 14th, 2024

Inflation affects every facet of the UK’s economy, so drivers have come to expect car insurance prices to steadily rise over time. Car insurance premiums often fluctuate due to a variety of economic and risk factors.

However, more recently, car insurance price increases have been steeper than usual. It is expected that EY’s prediction for consumer premiums to increase by 25% in 2023 will be confirmed when the latest data is made public. EY also forecast that premiums will rise by a further 10% in 2024.

So, why are car insurance premiums going up at such a rate? In this guide, we’ll take a look at the various economic factors at play – and some of the driver-specific risk factors that can drive up premiums. Finally, we’ll share some expert tips to help you adapt to these rising costs.

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What are the key factors driving car insurance price rises?

  • Inflation

    Whilst the effects of the UK’s cost of living crisis have been felt across every sector in recent years, car insurance price rises have been significantly higher than the average rate of inflation.

    This can be attributed to pricing pressures from other areas of the automotive industry. For example, rising repair costs mean that insurance companies are paying out more for accident claims than in previous years.

  • Changes in regulatory policies

    In early 2023, the Financial Conduct Authority (FCA) introduced a new rule stating that insurance companies can no longer charge existing customers more to renew their insurance than what they charge to new customers to take out a policy.

    As a result of this rule change, many drivers switching insurers or taking out a car insurance policy for the first time no longer benefit from exclusive discounts as they might previously have done.

  • Increased insurance claims

    According to the Association of British Insurers (ABI), £47.2m worth of motor and property insurance claims were processed each day in 2020. With the value and frequency of insurance claims continuing to rise, it’s no surprise that the cost of insurance premiums rises with them.

  • Personal risk factors

    All insurance companies take personal risk factors into account; we’ll cover some of the most prevalent later in this guide.

    If your insurance premium has risen dramatically recently, this could be down to a change in your personal risk factors. For example, if the incidence of car crime in your area has risen sharply, this may be reflected in a higher premium when it’s time to renew.

Regional and demographic differences

Different regional and demographic groups will be affected by premium increases to differing degrees. After all, insurance premiums are influenced by factors such as the driver’s age, level of experience and postcode before any economic variables are considered.

For example, a young, newly qualified driver living in Inner London is bound to pay a higher premium than an older, experienced driver residing in suburban Scotland.

Which groups are facing the biggest premium increases?

  • Inexperienced drivers - 1 in 5 drivers are involved in a road traffic accident within their first year of driving. Therefore, it should come as no surprise that inexperienced drivers typically face higher insurance premiums.
  • Residents of high crime areas - If you live in an area that has seen an increase in car crimes such as theft and vandalism, it’s likely that your premiums will increase.
  • Drivers of rare or classic cars - The harder it is to source replacement parts for your vehicle, the higher your insurance premium is likely to be.
  • Drivers of high mileage cars - Vehicles with higher mileages are more likely to develop expensive mechanical faults, which drives up insurance premiums.

What else may cause my insurance premium to increase?

There are various ‘risk factors’ that can cause your insurance premium to increase. If your circumstances have changed and more risk factors now apply to you, you can expect your premium to rise accordingly.

Notable risk factors include:

  • Having claimed on your car insurance following an accident in the last five years.
  • Incurring penalty points on your driving licence.
  • Criminal convictions.
  • Certain car modifications.
  • Having a ‘high risk’ occupation. Police officers, bar and club owners, market traders and pub landlords are considered more likely to make insurance claims by many providers.

Certain economic factors can also cause your insurance premium to go up, including:

Insurance Premium Tax (IPT) - This is a tax applied to all types of insurance premiums, including car, home and pet insurance. There are two ITP rates: a standard rate (currently 12%), which applies to most car insurance policies – and a higher rate of 20%, which applies to certain car insurance policies.

The higher ITP rate often applies to new cars that have been bought through a dealership. Therefore, if a dealer offers you insurance, you should check whether you’ll be paying this higher rate.

Uninsured drivers - If you are involved in an accident with an uninsured driver, you can submit a claim to the Motor Insurance Bureau (MIB). However, the MIB is funded by insurers, which means law-abiding drivers ultimately bear the cost of these claims through increasingly higher premiums.

Ogden discount rate - The personal injury discount rate (also known as the ‘Ogden discount rate’) is a calculation used to determine how much compensation insurers should pay to those who have suffered life-changing injuries.

A settlement should account for the claimant’s future loss of earnings – and cover any care costs. However, as the settlement will be paid in a lump sum that will likely be invested when it is received, the amount is also adjusted to factor in the interest the claimant would expect to earn.

In March 2017, the discount given to insurers was reduced to 0.75%, which effectively cost the industry millions of pounds, as many claimants would now receive bigger payouts. To cover these costs, insurers had to increase their premiums.

Other factors that affect car insurance prices

  • Your age - Young drivers typically pay the highest premiums, followed by older drivers, aged 70 and over.
  • Your postcode - Where you live will influence how much your pay for your car insurance. How urbanised and densely populated an area is will impact insurance premiums, along with local car crime statistics and the number of uninsured drivers.
  • Your car insurance group - The higher your car insurance group, the higher your premium is likely to be.
  • No claims discount - If you don’t have a no claims discount, your premium is likely to be higher, as you will be considered a higher risk driver.

How to get the best deal on your car insurance

Here are a few options that can help you reduce your car insurance premium:

‘Black box’ insurance policies – A ‘black box’ is a telematics unit that is fitted to the policyholder’s car to provide the insurer with data on how the car is being driven.

A black box insurance policy incentivises you to stick to speed limits and drive safely at all times, as the driving safety data that is sent to the insurer will influence the cost of your insurance premium.

Just bear in mind that some black box policies include mileage and nighttime driving limitations. Therefore, this may not be a viable option if you have a long commute or work shifts.

Voluntary excess – A voluntary excess is a sum of money that you agree to pay towards the cost of a car insurance claim.

This is paid on top of the compulsory excess, the minimum amount a policyholder must pay towards a claim, which is set by the insurer. Setting a higher voluntary excess can reduce the overall cost of your policy.

Shopping around - Pricing for identical car insurance policies can vary considerably depending on your choice of provider. Therefore, when the time to renew approaches, it’s worth using a price comparison site or app to evaluate all the available options, rather than accepting your provider’s renewal quote right away.

Paying upfront - If you pay your annual insurance cost upfront, you won’t pay interest, which will reduce the amount you’ll pay overall.