Unravelling the costs of car insurance
Given the sheer number of questions would-be drivers have to answer when applying for cover, it is clear that the formula for calculating a car insurance quote is a complex one.
Vehicle group ratings; driver age and occupation; mileage driven; where the car is kept; claim record of the applicant, are all factors that are taken into account.
However, a review for the RAC Foundation of insurance markets across Europe suggests that UK drivers are also hit hard because of the high cost of settling catastrophic injury claims in this country.
Pay outs can be seventeen times larger in the UK than in some other European countries, thus forcing the cost of insurance for all drivers, particularly young ones, to increase.
Meeting the long-term care costs of some of those catastrophically injured in road accidents can result in compensation payments of around £10 million, significantly ahead of Germany and France (both at £6 million). In Sweden, compensation might be as little as £0.6 million.
The largest factor in the size of a claim is what proportion of the medical and care costs are met by the state, and how much is the responsibility of the injured party – and their insurer.
The study – by Nick Starling, the former Director of general insurance at the Association of British Insurers – argues that national differences in levels of compensation are likely to increase now that the government has changed the so-called discount rate.
The move is likely to result in insurers having to pay much larger up-front, lump sums to fund ongoing care for those badly hurt on the roads. The report says: ‘The UK Government’s own calculations for a young quadriplegic requiring £100,000 a year in care costs is that the lump sum award will increase from £5-6 million to £9 million – up around 60 per cent. The UK Prudential Regulation Authority has estimated that overall claims costs could rise by £2 billion annually.’
The biggest burden of the change is likely to be felt by young drivers in terms of increased premiums, because they already pay the highest amount for policies.
While the UK doesn’t have the highest proportion of uninsured drivers in Europe – Italy has twice as many, for example – the RAC Foundation is concerned that the almost prohibitive costs of running a car might make an increasing number of drivers take to the roads without adequate cover, hence putting all other drivers at risk.
One thing the government could do to counter price-rise pressures elsewhere is reverse the recent hikes in insurance premium tax, the rate of which now stands at 12 per cent.