Why is car insurance so expensive?

Why is car insurance so expensive?

This article was originally published on 31.08.2019, but we updated it on 06.08.2019. We felt it could be more useful and comprehensive.

Fraud, middlemen and uninsured drivers all add to the often massive costs of car insurance.

The price of car insurance also depends on your age, your job, your postcode and the vehicle you drive.

Why car insurance is expensive

There’s a bunch of reasons. Let’s run through them.

The number of people involved pushes up the cost of car insurance

When you buy car insurance, there are a lot of parties involved. The chain usually looks something like:

customer → price comparison website → software house → insurance broker → underwriter

It’s a long process. And at each stage, someone gets paid. This makes car insurance more expensive.

We’ve simplified things a bit. It goes:

customer → Cuvva → underwriter

Much tidier.

Fraud makes insurance more expensive for everyone (~£90)

Insurance fraud is a big problem, especially in the world of temporary car insurance.

Whiplash alone costs insurers £2bn per year. Many of these claims are fraudulent, but whiplash is almost impossible to disprove, so insurers usually pay out.

This drives up the price of insurance for everyone. It’s thought that whiplash claims alone add about £90 a year to the average insurance policy (according to the ABI).

In early 2018, the law was changed to stop fraudulent whiplash claims. It knocked about £35 off the cost of insurance premiums.

(We’re always doing our best to tackle insurance fraud. That’s why we ask for pictures of you and your vehicle when you sign up. We’re not being nosy.)

Crashes with uninsured drivers (~£30)

Many people get behind the wheel without car insurance. And that makes insurance more expensive for everyone else. 

When an insured driver has a crash with an uninsured driver, someone has to pay out. And that someone is the underwriter of the insured driver.

Because of this, premiums go up for everyone.

It’s thought that uninsured drivers add £30 to the average insurance policy.

Why your car insurance premium suddenly went up

Sometimes it seems like your car insurance has gone up for no reason. Here’s why that happens.

Rising insurance premium tax (IPT)

When you buy car insurance, you pay Insurance Premium Tax (IPT) rather than VAT. Like VAT, IPT is set by the government.

IPT is getting higher and higher. In 2011, it was 6%. And in 2017 and 2018, it was 12%.

For some kinds of insurance – like travel insurance – ITP is even higher, at 20%.

In time, IPT will probably line up with VAT. But we’re not quite there yet.

The Ogden discount rate

The Ogden discount rate helps insurers work how much compensation they have to pay for life-changing injuries. 

In 2017, the rate changed from 2.5% to -0.75%, meaning insurers have to pay out much more. But in 2019, it went back to up to -0.25%.

Higher Ogden discount rates make car insurance more expensive for everyone.

Misleading temporary discount rates

Some insurers offer very low premiums just to get customers through the door. Then they bump up the cost next year and hope you won’t notice.

This means your car insurance premium will jump up occasionally anyway, even without all the other things we’ve listed.

(So we’re clear, we don’t use that pricing strategy at Cuvva. If we change the price of your cover, it’s always down to data analysis. 🤓)

Why your car insurance is so expensive

But it’s often the information you give to your car insurer that really bumps up the cost.

Here’s why your car insurance might be so expensive – and what you can do about it.

Your age

Young drivers pay more for car insurance than older, more experienced drivers. This is because they’re more likely to crash.

Under-25s tend to pay a lot. And then the cost gradually gets lower as you get older.

But there are ways for young drivers to get cheaper car insurance. They can:

  • Get a black box policy
  • Add a parent to their policy
  • Get a car from a cheaper insurance group
  • Buy temporary car insurance

Your vehicle

The car you drive affects the price of your insurance. Faster or more expensive cars tend to cost more. Cars with lots of safety features tend to cost less.

Cars are categorised within different groups for insurance purposes. Depending on what group your car falls into, you could see a big jump in your insurance premiums.

Your job title

Some jobs are “riskier” to insure than others, so drivers in certain professions get higher premiums.

This has nothing to do with driving for work, because most car insurance policies don’t cover driving for business purposes.

It’s all about the historical data insurers have about how people in those professions drive.

You can often cut a bit off your insurance premium by carefully choosing how you describe your occupation. But there’s a big difference between this and lying about your job, which would make your policy invalid.

Where you live

Even your postcode can bump up the price of your insurance. This is because most accidents happen within five miles of the driver’s home.

Insurers look pretty carefully at driving stats in your location when you apply for insurance. They’ll consider how many:

  • Crashes and thefts take place
  • Uninsured drivers live there 
  • Fraudulent claims are made

At Cuvva, we use a few bits of location data to figure out your price. That includes:

  • The postcode your driving licence is registered to
  • Your residential postcode
  • Your actual location when you start the policy

The only solution to this one is to up sticks. If that inner-city London postcode is taking its toll on your premiums, there’s always the Isle of Barra. People who live there get a great deal from insurers.