Budget 2017
Car insurance premiums have soared to record levels driven by tax hikes and claims costs iStock

Car insurance premiums have surged to record levels driven by tax hikes and claims costs, the industry claimed.

The Association of British Insurers (ABI) said the average price paid for comprehensive cover in the second quarter of the year jumped 11% to £484. The body said this was the fastest rise in premiums since it began tracking them five years ago.

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The ABI blamed the £48 hike on the government's decision earlier this year to loosen rules on how compensation payments are calculated for car accident victims, increasing the size of insurance pay-outs.

It added the government's move to raise Insurance Premium Tax from 10% to 12% in June also contributed to higher premiums.

The insurance lobby group called on the government to introduce a new system for calculating compensation payments. The Ministry of Justice has already consulted on a replacement system, but hasn't yet announced its decision.

ABI director general Huw Evans said: "The UK is one of the most competitive motor insurance markets in the world, but the unprecedented increase in claims costs is driving up prices to record levels.

"Most younger and older drivers are likely to face increases even higher than this, hurting people who can least afford it.

"Worryingly these increases are unlikely to be the end of the road if reinsurance premiums go up at the end of the year, adding further costs to insurers."

Uninsured drivers

But personal injury lawyers say the insurance industry has been quietly reaping profits, while failing to pay proper compensation to those seriously injured in accidents.

The government said its decision earlier this year to adjust the so-called discount rate ­– used to calculate personal injury payouts – was necessary. This was because the value of compensation was being damaged by low interest rates in the economy, forcing many victims to become dependent on the state.

Accountants PwC also calculate that the youngest drivers might have to pay an extra £1,000 more for cover.

There are also concerns that the number of uninsured drivers on the roads could jump if insurance continues to soar – particularly as budgets are already being squeezed by higher inflation and weak wage growth.