Drivers face further insurance price hikes as insurers backtrack on premium reduction promise

Rises in repair costs, the pound's post-Brexit devaluation and a proposal to boost payouts for individuals who suffer life-changing injuries will likely wipe out the pledged £50 annual saving.

A Government consultation closed last month on proposals to scrap the right to compensation, or – at the very least – put a cap on the amount that people can claim for minor whiplash injuries.

The insurance industry has long supported plans to cut personal injury compensation for those involved in minor road collisions – as it would mean it could avoid paying out to certain claimants.

In return, insurers have vowed to pass on the savings they would make to consumers in the form of reduced car insurance premiums. The ABI estimated that the average saving would be up to £50/yr if its preferred version of the whiplash reforms were given the green light.

However, in a Justice Committee evidence session yesterday, the ABI's director of general insurance policy, James Dalton, backtracked on his previous assertion that "much-needed reform to the civil justice system" would save motorists "up to £50 a year on average".

When challenged by Labour MP David Hanson that "there was an implicit promise that premiums would fall in the event of the Government's proposals being accepted", Dalton conceded that other factors – such as the falling value of the pound and higher repair costs – meant that car insurance premiums would in fact increase in future, regardless of the whiplash reforms.

He said: "The average premium is going up and may even go up further. Civil litigation reform is not done in isolation to the wider economy and wider market.

"You've seen a devaluation in the pound, you've seen increased repair bills in the context of increasingly technologically advanced vehicles with laser systems etc and you've got a proposal that the discount rate should be reduced, which will cost insurance companies billions of pounds – those costs will be passed on to consumers through higher car insurance premiums."

Check out our Cheap Car Insurance guide for help in minimising premium rises.

Why are insurers now backtracking on their promise?

As with most situations, it all boils down to money. The ABI is now arguing that "unforeseen" pressures on insurers' profit margins mean that future premium reductions can no longer be guaranteed.

Arguably the most significant factor is the likely reduction in the 'discount rate', which is used by insurers for discounting their liabilities on matters such as payouts for people who've suffered life-changing injuries.

The rate has stood at 2.5% since 2001, but Lord Chancellor Liz Truss is widely expected to announce a cut to the rate later this month. If that happens the insurance industry could lose out on billions because it'll have to pay out higher lump sums to those who suffer serious injuries in accidents.

Another driving force behind the U-turn on premium reductions has been the rapid rise in insurance premium tax (IPT) over the past two years. This is a tax on insurers that's usually passed on to consumers in the form of higher premiums.

An ABI spokesperson has denied that the industry was backtracking on promises to reduce premiums. They told us: "It's a fast changing situation. If cost savings can be achieved then they will be passed on to the consumer."

The increasing cost of repairs has been cited by the ABI as a driving force behind rising premiums

How can I avoid paying more for my premium?

It remains to be seen how the whiplash reforms will impact premiums, but you can use the information that's currently available to secure cheaper deals.

For instance, we know the latest IPT hike (from 10% to 12%) will be rolled out in June – so it's worth checking in March or April if your insurance is due for renewal, as it's possible to lock in a more favourable quote within 60-90 days before a policy is due to start.

Johanna Noble, associate editor at MoneySavingExpert.com, said: “Insurers have long promised that these whiplash reforms will help cut premiums – but now it seems they’re furiously backtracking. Unfortunately the cost of car insurance, which is already rising sharply, looks set to keep climbing further.”

“More than ever it’s worth checking if you can drive down the cost by finding a cheaper deal – even if you’re not at renewal. Some are overpaying by £100s a year.”

What's happening to car insurance prices?

Motor insurance premiums hit their highest recorded levels in the last three months of 2016 – and rose more than five times the rate of inflation during the course of last year.

The ABI's 'motor premium tracker' – which measures prices consumers actually pay for their motor cover, rather than quotes – shows that in the fourth quarter of 2016:

• The average price paid for private comprehensive insurance was £462. The highest figure previously recorded was £443, in Q2 2012.

• This was up 4.9% on the previous quarter, adding an extra £22 to the average premium.

• The average premium over the whole of 2016 was 9.3% higher than the average premium over the whole of 2015.