Young drivers to bear the brunt as car insurance costs continue to rise

Changes to the way payouts for injury claims are calculated could see premiums soar by up to £1,000 for drivers under 25

G etting the keys for a first car is a milestone in the lives of many young people. Another is the arrival of the first insurance bill, which shows that driving is an expensive business – and one that is about to get even more so.

Changes announced by the government in how compensation payments are calculated are expected to affect motor insurance premiums across the board in the coming weeks – but drivers under the age of 25 are expected to be hit by disproportionately large rises.

While the average motorist is expected to see hikes of between £50 and £75 on their comprehensive policy, younger drivers could soon see theirs rise by up to £1,000 – bringing the average premium to well over £2,000 in some instances. All of this at a time when car insurance costs have hit their highest ever recorded levels.

Compensating victims

Last week, the government announced changes to the way that compensation payments to people who suffer life-changing injuries in car accidents are calculated. When victims get money, the amount received is reduced according to the interest they can earn by investing it, called the discount rate. This rate has been set at 2.5% for the past 16 years. But now it is being reduced to -0.75%, meaning victims will receive more money – and also that insurers will have to pay out more. As a result, so will drivers for their insurance policies from 20 March.

The accountancy firm PwC has estimated that the cost to the average driver paying £450 for a comprehensive policy will be between £50 and £75 a year. But because young drivers are those mostly responsible for the serious accidents that prompt the payouts, they will be heavily penalised in their premiums by up to £1,000.

“Unfortunately, young drivers are responsible for most of those accidents – drivers aged under 25 cause 85% of the serious injury accidents. They disproportionately affect those serious injury claims,” says Mohammad Khan, UK general insurance leader at PwC. “Those claims have now shot up in value. From a pricing perspective, the people more likely to cause those accidents will have far greater premiums.”

Bad news on top of bad news

It is already an expensive time for young drivers. A report from comparison website Comparethemarket said the annual average cost of running a car was just under £2,400 after insurance, fuel, taxes and other charges were added together. Insurance takes up the biggest proportion of that cost and is up on the same time last year.

In June, meanwhile, the insurance premium tax, which is added to general insurance policies, will rise to 12% after a series of increases over the past two years. In 2010 the tax stood at just 5%. Coupled with rises in the price of fuel, the developments will be particularly felt by drivers under the age of 25, who already pay about two-and-a-half times the average for their premium.

“They have less disposable income with which to weather these storms, so we are quite worried about the effect of young drivers trying to stay mobile,” says Simon McCulloch from Comparethemarket. “They have got a little bit less money relative to generations before them, they have got higher fuel costs, they have got more expensive insurance and it does feel like it is a little bit harder.”

Dodging the bill

With the potential price rises comes the risk that young people will try and avoid paying – by claiming that they are not the primary driver or by taking to the road without insurance.

“I think there are two possible negative outcomes,” says McCulloch. “The first is that young drivers simply can’t afford to drive, and that has a load of potentially negative economic consequences. If they can’t drive, that limits their ability to find employment and maybe go to college.

“The second negative outcome is maybe they will get desperate and not insure their vehicle. Or maybe they will cut corners on that insurance and will get themselves in a lot of trouble.”

The Association of British Insurers (ABI) has described the change to the discount rate as a “crazy decision” and agrees with the estimates of potential four-figure increases. “Lots of young drivers rely on their cars – whether to get to school or university or college or work – and it is very important that we have an environment which does not encourage practices that are unhelpful or in some cases illegal, such as fronting, where the parent buys the insurance and has the young person as the second driver when it is actually just the young driver driving. Or driving uninsured, in the worst cases,” says Matt Cullen of the ABI.

What can be done?

The Ministry of Justice, which announced the changes on the rate last week, did not comment on the potential effects on younger drivers. Meanwhile, the chancellor, Philip Hammond, is expected to meet representatives of the insurance industry to assess the impact of the changes.

But can the industry itself resolve the problem by absorbing some of the costs? The scale is too big, according to the ABI. “This is a huge, huge hit to the insurance industry. It is in the billions, not in the millions. No industry can absorb that kind of cost imposed on it without those costs trickling through. It simply is not possible,” says Cullen.

There are, however, ways to ensure that your insurance premiums are more affordable. “If you can, downgrade your car,” says Khan. “A young person can’t affect their age, which is almost always the biggest determinant of their insurance. But [there are] other determinants of insurance – how fast your car goes; how expensive your car is, which is a proxy for how expensive it is to repair; where you live; where you park your car overnight; how many miles you drive. What you should never do when you fill in your renewal is lie on the form.”

Which? advises young people to consider buying telematics or “black box” insurance coverage. This typically involves the user’s driving being monitored by a device that is fitted to the vehicle. Good drivers can be awarded with cheaper insurance.

Putting an older driver on the policy can make the cover cheaper, the consumer group says, but it adds that it is illegal to put them as the main driver if that is not the case.

Ultimately, however, it appears that there is no avoiding price rises for young people in the coming months. “In the short term, young people are going to face price increases – that is a certainty,” says Khan. “Whether they face it all the way up to £1,000, maybe they won’t – but they will face price increases because of this drop in the personal injury discount rate.”

LESS POPULAR MEANS LESS MONEY

Research shows that young drivers can save almost £400 on their average insurance premiums by driving cars that may not be top of their shopping list.

Details from Comparethemarket show that the average premium for the Vauxhall Corsa, the most popular car for 17- to 24-year-olds, is just under £1,300. Meanwhile, the Volkswagen up! costs just over £900 in cover.

According to the figures in the index of young drivers’ motoring costs, the most expensive popular car is the Volkswagen Golf, which is an average of £1,557 to insure.

Comparethemarket’s Simon McCulloch says driving certain cars can result in marked savings. “With the top 10 most popular cars costing an average of £1,282, and the average of the 10 cheapest cars to insure costing £951, there is clearly some value in considering insurance when buying a car,” he says.

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