Insurance premiums set to increase this year

Insurance premiums are rising and will continue to do so, although shop-around prices are still vastly cheaper.

We've had it lucky with insurance for many years now. Prices have stayed on hold and even shrunk, but this is changing. Premiums have recently begun to rise for some types of insurance and will continue to do so, thanks to a higher perceived risk of floods and storms, the increasing cost of dealing with claims, and, in particular, unsustainable competition.

Car insurance

In the areas where insurance prices have already begun to rise, it is very dramatic. The AA carries out some thorough research every three months. In its latest quarterly report it shows that, over the past twelve months, comprehensive car insurance prices have risen 11% to £778.

Third-party, fire and theft cover is up 7% to £968. (This insurance is, on average, more expensive than comprehensive insurance because it's usually younger drivers who buy it. This sometimes causes anomalies in pricing where an insurer will charge less for comprehensive than third party, fire and theft to young drivers with old cars. Therefore, such drivers should always get quotes for both comprehensive and third party, fire and theft!)

What's interesting is that the shop-around third party, fire and theft premium is up a massive 13% (to £670). Competition for new third party, fire and theft business is diminishing fast, which explains the rapid increase. For years insurers have been withdrawing or pricing out third party-only insurance, because they believe the cover to be too small.

Now it looks like the same thing may be happening to third party, fire and theft. Whether third party, fire and theft will become virtually extinct, like third party-only, remains to be seen, but we can certainly expect more price increases over the next 12 months and a further reduction of competition.

Insurers have increasingly been saying that prices are unsustainable for many types of insurance and car insurance is definitely one of them. Car insurers have paid more in costs and claims than they've received in premiums for more than a dozen years.

This year alone, they expect to lose around £240m. Although insurers make more money by investing our premiums, these losses still put pressure on prices, particularly now, as the stock market has performed so badly.

So I think car insurers won't be as willing to discount prices for new customers next year and this trend will likely continue. If you can find a good deal now, you'd better go for it - quick.

Home insurance

It's a similar story with buildings insurance. Over the past year, prices are up 10% to £224. The average shop-around price is up just half as much, 5%, to £133.

I think I can explain the difference. As most people stay, on average, 10 years with their home insurer, insurers remain prepared to significantly discount new business knowing that they'll likely get another nine years out of you, even though they'll charge you £90 more, on average, for each of those years.

Buildings insurance is typically much more profitable than car insurance, but several floods have pushed up costs and made insurers re-think pricing. The industry expects more big claims. This will affect all of us, not just those of us in high-risk areas, because the cost is, to an extent, spread around.

Here's some good news: contents insurance continues its downward trend that's lasted since 1994, with few blips, when the AA first started tracking prices. The average price fell another 6% over the year to £122.

The trend might be due to improved pricing. Higher crime areas have more costly insurance now, which probably means that many in those areas don't bother with it. Also, insurers are getting much better at spotting fraudulent contents claims.

More factors to affect prices

Insurer Legal & General is being considered a takeover target in a sign that the market is already looking to consolidate. This is what happens when the insurance cycle changes from one with high competition and lower prices to one with less competition and higher prices.

Insurers are increasing prices and they will next consolidate to cut costs and boost profits. Insurers who fail to pass on increases or to consolidate will fail. When the weak are either bought out or bust, competition will reduce and prices will go up even further.

Shop-around price much lower

Shop-around prices are the prices you get when you, well, shop around - usually using a comparison service like our own here at lovemoney.com, but also doing your own research with regard to insurers which don't allow other sites to show their prices, such as Aviva (formerly Norwich Union) and Direct Line.

Inevitably, the time you put in is worth it as insurers offer much higher prices to loyal customers who simply renew than to customers who shop around.

Take heed of this data from the AA, showing the big differences between average prices and  average shop-around prices:

When it comes to renewal, your insurer will normally keep your price the same even when prices are falling, or if prices are rising it'll up the price dramatically over a few years so you're more in line with average prices - but not average shop-around prices.

Here's one final tip. The AA reported that, at present, most people will typically save more money by buying buildings and contents insurance separately, not with the same provider. So don't forget to check this too!

> Compare car insurance prices.

> Read Life insurance cheapest in seven years.

> Read 8 savvy tips to cut your home insurance.