The car insurance price war is fizzling out

Companies say competition has driven premiums too low. Now they are starting to rise, writes Tony Lyons

Good times may be coming to an end for car drivers if the insurance companies have their way. They claim that severe competition has driven premiums too low and cite the recent collapse of Paramount Insurance, a Watford company with some 40,000 policyholders, as an example.

Although there were a number of reasons for the collapse of Paramount, including its failure to recoup a large debt from an associated firm, it had a very aggressive business policy that included matching the rate offered by any other company. This price matching led to unrealistically low premiums.

Paramount appears to be the first motor insurance company to go to the wall since Vehicle and General over 25 years ago, when more than 1 million motorists risked being left without cover.

Perhaps one should not be too surprised that after two years of falling motor insurance premiums most companies are now trying to talk up rates.

The average motorist driving a typical family car with a full no-claims discount is today paying between 15 per cent and 25 per cent less than in 1993.

Severe competition, including the impact of telephone-based direct insurers nibbling away at broker business, have contributed to the fall in rates.

The problem for insurers is that profits are showing signs of tailing off. Results for 1995 were good, but the writing was on the wall. Already this year Direct Line has reported a sharp fall in profits for the first quarter of the year, indicating that the company's headlong growth, which means it now has more than 2 million motorists on its books, is tailing off at last.

Across the board, whether selling direct or through insurance brokers, most companies are publicly claiming that insurance rates for the private motorist will have to go up.

General Accident was the first of the large insurers to make a move, introducing a 4 per cent increase in premiums last April. This month it is increasing premiums by another 4 per cent. "We are not going to sacrifice profit for growth," a spokesman says.

Other insurance companies are levying less painful rises, for the time being at least. Cornhill Insurance - the company that insured the van wrecked by a jet plane crash in west London this week - will be increasing its motor premiums by 1-2 per cent in September. This is likely to be a growing trend.

Despite the wish to push up premiums, a fiercely competitive market place means companies are still adopting a cautious "after you" policy. They know a volatile market place means people are far more prepared to look for a cheaper alternative.

Also, pressure from insurance brokers, which were losing a lot of business, has led to the traditional insurance companies fighting back with premium rates just as good or even lower than the direct insurers.

In part, premiums still face downward pressure because of a reduction in crime-related claims. Joy riding and stealing cars are less of a problem than before, while theft from vehicles has declined by 2 or 3 per cent in the past year. Better inner-city security with remote control cameras has also helped this trend.

Insurers even benefited from the recent car sales recession. Car prices did not increase while competition also kept down the costs of repair parts and labour.

Now all this is coming to an end. Car prices have started to rise again in the wake of buoyant sales figures over the past two months. Repair costs are likely to follow suit.

In addition, this autumn is likely to see the delayed introduction of the Ogden Tables, used by courts to assess claims in third-party motor injury cases. Through complicated formulae based on the life expectancy of the injured party, they will take the lottery out of motor injury compensation cases. However, all the insurers expect a big increase in the sums they will have to pay out in claims.

But not all is bleak for the motorist. The Co-operative Insurance Society, for example, which cut its motor premiums by 12 per cent last October, has promised to maintain its current rates until October 1997. "As a co- operative, we have strong reserves," says Bill Webb, CIS deputy chief general manager. "Our experience with claims has been better than we were expecting and the benefits are being returned to our customers."

The market will remain fiercely competitive for some time yet. Some of the direct insurers, for example, have tele-sales staff who work on a quota system. This means that near the end of the day, if they have not filled their quota, they are quite prepared to offer a lower premium to motorists than the prices quoted earlier in the day.

Car drivers should take advantage of the situation by looking around for keen prices and quality of services. But bearing in mind the experience of the Paramount policyholders, they should make sure that the insurance company they are looking at has strong reserves or a wealthy parent.

They should also take account of any loyalty bonuses being offered, even if premiums are being increased. For example, many of the established insurance companies offer discounts of up to 25 per cent of the first month's premium, or a similar cashback for annual premiums, to policyholders who have not made a claim when their policies come up for renewal. Motorists can expect to see further inducements from their insurance companies.

Another point to remember is that insurers are far more prepared to "cherry- pick" good clients. If you are a pillar of the community who garages the family Ford Fiesta every night and only drives on Sundays, there is a insurer waiting to offer you cheap rates. Conversely, Ferrari-driving teenagers may find cover a wee bit more expensive.

Overall, if the motor insurers can get their way, then premiums will rise. As profits from car insurance begin to decline, the choice is to increase premiums, leave the market place or merge to get costs down. The recent merger of Royal and Sun Alliance could be just the first.

Motorists can take comfort from the fact that the premium war so keenly fought by insurers now means that a price-sensitive public will not easily return to the days when every renewal meant another hike in costs.