Why are car insurance premiums going up? – Advisor UK

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Drivers have plenty to contemplate this year. Will far-off conflicts feed through to higher fuel prices at the pumps? Will insurance premiums ^[1] keep rocketing? Will the transition to electric vehicles gain further momentum?

The final months of last year and the first few weeks of 2024 saw petrol prices reduce on the back of falling wholesale oil costs. But tension in the Middle East – particularly disruption to the vital Red Sea shipping lanes – means uncertainty has returned.

Aidan Rushby, boss of car finance app Carmoola, says short-term pricing pain won’t be soothed by the long-term adoption of alternatives to oil: “Volatility is to be expected. The global oil market remains susceptible to geopolitical factors, and UK drivers will continue to see fluctuations at the pump.”

He continued: “Alternatives such as biofuels and hydrogen are gaining traction across the transport sector, with well-publicised ‘green flights’ having already been trialled. But adoption remains limited and infrastructure – particularly for domestic car applications – needs building.”

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How do infrastructure issues play into the wider uptake of electric vehicles? The government has already pushed back a ban on the sale of new internal combustion engines by five years to 2035, but concerns remain that a universally-accessible on-street charging network will not be ready in time for a general transition to an electric private motor fleet.

There are ambitious plans for a national network of 300,000 chargers by 2030, but it remains to be seen how deeply the network will penetrate into rural areas.

In what might be seen as a contradictory measure given the 2035 delay, the government has proceeded with the implementation of its zero emissions vehicles (ZEV) mandate. This obliges car manufacturers to ensure that at least 22% of their sales, including 10% of van sales, must be fully electric in 2024.

This will rise steadily, reaching 80% for cars by 2030 and 100% by 2035.

If that requirement is likely to boost EV supply, another twist to the story could serve to reduce demand: electric cars will start paying £10 in Vehicle Excise Duty from April 2025 (they are currently exempt), with their VED liability rising to the standard rate by 2026. And their exemption from London’s Congestion Charge will expire in December 2025.

But if there is one cost that is causing alarm to drivers generally and would-be drivers of EVs in particular, it is soaring insurance premiums.

Why are car insurance premiums going up so steeply?

Repair bills are rising because of shortage of parts and associated price increases, alongside higher garage running costs such as energy bills and wages.
Supply chain disruption means repairs are taking longer, which means drivers are keeping courtesy cars for longer.
Sophisticated engines and control systems are more expensive to repair, both in terms of parts and labour.
Electric cars – which now account for more than one million vehicles on UK roads ^[2] – cost more to repair because of availability and expense of parts and shortage of skilled mechanics.

It is also the case that EVs may more readily be written-off by insurers, even after a relatively minor incident. This is either because the cost of replacing a damaged battery is prohibitively expensive, or they are unable to determine whether the battery pack is damaged..

In such cases, the driver will receive the adjudged value of the car, which is likely to fall far short of the cost of buying a like-for-like replacement.

The price of electric car insurance has risen at an even more alarming rate than for traditional internal combustion engine cars, signalling that insurers do not want this business on their books.

One firm – Covea, which underwrites policies on behalf of John Lewis Group, among others – pulled out of insuring electric vehicles altogether in 2023, even refusing to renew existing policies.

Andy Moody, boss of short-term car insurance provider GoShorty, says: “With the shift to EVs, vehicle insurers will need to consider a huge variety of factors, such as the total value of the vehicle, details of the driver, plus other aspects such as the potential cost of repairs for the vehicle. These will all impact insurance premiums.

“Insurers will need to find the right balance between a fair price for comprehensive cover and not disincentivising consumers to choose an EV.”

What can you do to cut the cost of car insurance?

Shop around two or three weeks ahead of renewal when the lowest quotes are available.
Increase your voluntary excess, but not to the point where you can’t afford to pay it in the event of a claim.
Reduce your annual mileage and consider a black box ‘telematics’ policy that rewards you with lower premiums if the data shows that you are a relatively safe driver from an insurance perspective.
Pay upfront if you can as instalments work out to be more expensive – if the single payment is too much, consider using a 0% interest purchase credit card ^[3] and clearing the debt in 12 months.

Autonomous vehicles

As well as developments in how contemporary cars are powered, drivers will also need to get used to their vehicles becoming increasingly autonomous. There are six recognised levels of automation, ranging from zero (no automation) to 6 (full automation, no driver necessary) but even the most advanced cars on the roads today are only in the foothills of Level 3.

Mr Rushby at Carmoola says: “Advanced driver-assistance systems, which help with lane control and collision avoidance, for example, will become more sophisticated, but Level 4 and 5 autonomy (no driver required) is still going to be several years away at least.”

He adds that the Law Commission is reviewing self-driving legislation, with a focus on liability and insurance implications. There are many threads to this – not least who picks up the tab if an autonomous vehicle causes an accident – which will take time, effort and expertise to knit into a body of law that works for all concerned.

Mr Moody at GoShorty says recent advances in artificial intelligence (AI) will play a part in accelerating the development of autonomous vehicles – and society in general will need to keep up with the pace of progress: “The integration of more sophisticated AI algorithms and machine-learning models is expected to enhance the decision-making capabilities of autonomous vehicles, to not only improve safety features but also enable these vehicles to handle complex driving scenarios.

“But consumer and regulatory concerns represent a huge barrier to this growth, with public opinion of autonomous cars remaining divided.

“Advancements in the autonomous vehicle space have been incredible, but from an insurance perspective, there’s still a long way to go. It will be some time before self-driving cars are common on our roads, and insurers in the UK will be carefully planning the insurance implications that they bring.

“Aside from insurance, autonomous vehicles have a PR problem to overcome before they win the trust of the public.”

Car connectivity

Another technology issue confronting drivers in 2024 and beyond is connectivity – the ability of cars to communicate with other software systems and collect data from their surroundings.

Mr Moody says this too could have implications for the cost of insurance: “From an insurance perspective, ever-increasing amounts of valuable tech in cars could see prices start to increase, but equally, having the potential to provide insurers with data about how well you drive could do the opposite.”