We all hate having to pay insurance, whether it’s on our homes, pets or cars. The thing is, while it’s optional on most things, you get no choice when it comes to your car. And what’s worse, car insurance is never cheap – but why does it have to be quite so expensive?

The simple answer is that insurance companies claim they don’t make much profit out of car policies, even at current prices. Many supposedly run at a loss, the business subsidised by more lucrative insurance areas such as home cover; here’s why they reckon it’s not profitable and why your car insurance costs so much.

Fraud

Too many people think that defrauding their insurer is a victimless crime. After all, claiming for whiplash in the event of a rear-end imapct is so easy. But everyone with an insurance policy ends up footing the bill so it’s far from a victimless crime.

Whiplash claims are a particular problem as about 1,500 are filed every day in the UK – we’re way ahead of other European countries when it comes to making such claims. They all add up to a massive £2 billion-worth of payouts each year, which is enough to add £90 to the average car insurance premium.

There’s also the spectre of cash-for-crash claims, in which collisions are staged so that claims can be made for personal injury. Nobody knows the scale of the problem but it’s reckoned this type of fraud adds around £44 each year to the typical insurance premium.

Inefficiency

The insurance industry isn’t always run as efficiently as it might be. It’s not unusual for a car to be scraped with just some light remedial work required to fix things. Yet the car’s owner could end up with a hire vehicle for weeks while an assessor does their job and the car languishes in a compound waiting for half a day’s work to be done to. Somebody has to pay for all those weeks of car hire, and you can guess who that is…

Uninsured drivers

Driving without insurance may be an offence but that doesn’t stop an estimated one million people from doing it. With the penalty for driving without insurance usually far cheaper than getting cover, plenty of people take the chance.

The problem is that uninsured drivers crash their cars and even though they don’t have cover, there is a fund (set up by the insurance industry) which will pay out. And that fund is paid for by contributions from those who bother to insure their cars – to the tune of around £30 per head.

Young drivers

Bravado and inexperience can be a lethal cocktail. Unfortunately, a disproportionate number of young drivers are involved in car crashes and the payouts tend to be particularly large thanks to personal injury claims.

So if you’re a young driver you’re going to be hammered until you’ve proved that you’re not a liability – telematics insurance can help here. Unfortunately, even if you’re not a young driver you’ll still be paying, because somehow all those hefty payouts on behalf of teenage drivers have to be covered.

Driving history

If you’ve got points on your licence or you’ve made a claim within the last 3-5 years, even if it wasn’t because of your own actions, your premium will be bumped up. So drive within the law – and don’t crash!

Your car

Insurers like completely standard cars, so not modifying yours is a good start. However, if it’s a model that’s popular with thieves or which has a reputation for being crashed, expect king-sized insurance premiums.

Your car also sits in a particular insurance group, which will affect the premium you pay. There are 50 insurance groups and the higher the number, the bigger the premium – in theory. The rating is based on factors such as your car’s value, performance, repair costs and more.

However, insurance premiums are based on the probability of you making a claim and each insurer has its rankings of which cars are most likely to be involved in a claim. Which is why you could find that you pay less to insure a group 25 car than a group 20.

You

This may seem harsh, but it could be that the key problem is you: where you live, your age, occupation, gender, or any one of a number of other factors. Insurance companies work out your premium based on the likelihood of you making a claim, based on all sorts of factors – so if you’ve got a high-risk job or live in a high-risk area, you’ll never get cheap insurance.

Shopping around

When buying anything you should shop around to make sure you’re getting the best deal. Online comparison sites make this easier than ever when it comes to car insurance, but however you do it, put in the legwork and you should be able to slash your premium.

Automatic renewal

Don’t just stick with your current insurer at renewal time because it’s too much effort to change. The chances are that when your renewal comes through it’ll cost significantly more than before – perhaps even double. Moving to another insurer or haggling with your existing one can see the premium tumble.

A small excess

Your excess is the amount you have to contribute in the event of a claim, before your insurer pays anything. Generally, the lower your excess, the higher your premium, so if you increase your excess your premium should reduce – but make sure you can afford to cough up if you have to.

Insurance Premium Tax

In 1994, Insurance Premium Tax (IPT) was introduced and set at 2.5% – it’s now four times that, at 10%. There’s nothing you can do to avoid it either…

As you can see, there are some things you can do to cut your insurance costs, but a lot of things are outside your control. What you mustn’t do is lie when taking out cover, to mislead your insurer. If money is tight you need to stick to a low-power car, drive carefully and shop around as much as possible.

And what you definitely don’t do is drive without insurance (make sure you’re not doing this inadvertently ) – because it will come back to haunt you…

Richard Dredge

September 2016