The economy has been through a turbulent time in recent years but it's not all been bad news.

Record low interest rates have helped homeowners and car insurance premiums have also tumbled consistently downwards.

However, the signs are that this purple patch is about to end for drivers with insurance premiums predicted to rise alongside inflation in the coming 12 months.

 

Breathing space for motorists
Frozen pay rises, redundancies and a rise in the cost of living have all put the squeeze on household budgets over the last few years, and for many, balancing income and expenditure is a tricky task.

Opting to keep a car running in this economic climate can sometimes be a borderline decision with the costs over insurance, daily use and maintenance eating away at a large chunk of disposable cash. But reducing insurance premiums have helped to provide drivers with a bit of much-needed breathing space.

At the beginning of 2014, the Association of British Insurers (ABI) reported that the average car insurance premium fell by 9% during 2013. This worked out as a typical saving of £36 per policy.

Part of the reason for the drop was the claim rate for whiplash injuries was expected to be far lower than in the past, reducing the expenditure for insurers, who could then in turn pass savings onto their customers.

However, the ABI said that premiums could be helped to fall even lower if more was done to tackle the fraudulent claims which plague the motor insurance industry. Fraudulent claims are expensive to investigate and if paid because of a lack of proof, skew the expected rate of payments. This leaves insurers with a greater expenditure which is passed on to customers via a hike in premiums.

 

Prices set to change
But whilst there is an ongoing drive to reduce fraudulent claims, experts are warning that insurance premiums are set to increase this year.

Financial firm Deloitte have released figures showing that for every £100 collected in premiums during 2013, £99 was paid out in costs and expenses.

This level of very modest profit means that insurers will inevitably be looking to up the contribution from customers, because at present, they are only just scraping an income.

2013 was the first year for some time that profits had been recorded in the motor insurance industry, as in recent years, higher than expected levels of claims, primarily due to fraud and misrepresentation, have pushed up the amount they have had to pay out. Therefore, whilst the income generated was only a small amount, it represented a success for the industry.

But during 2013, although the anticipated volumes of whiplash claims fell, and are expected to continue to do so, part of the drop in the price of premiums was funded by insurers. With reserves set aside for claims no longer required, part of the money was used to subsidise premiums, providing cheaper quotes for customers both new and existing.

This practice is not sustainable and experts believe that insurers will shortly have no option but to start charging more if they want to continue making a profit.
Motor insurance is predicted to rise in line with inflation.

Deloitte predicted that insurers will reverse the trend which has seen insurance premiums fall by an average of 12% between 2012 and 2014, suggesting that increases will be recorded which are in line with inflation.

Insurance experts from Deloitte have suggested that in the coming 12 months, premiums will start to rise, initially matching the rate of inflation. There's no sign of an immediate hike in costs but drivers should start to prepare themselves for a rise in the cost of continuing to run their car.