Car insurance costs hit seven year low but new rules could end cheap deals

The cost of car insurance has hit a seven-year low – but cheap deals are set to disappear on 1 January when new rules come into force.

Car insurance cover fell an average of £80 annually in the three months to the end of November, according to comparison site Compare the Market.

It now sits at £640 – the cheapest average price for that three-month period since 2014.

Insurers have kept the cost of policies low to attract new customers ahead of new Financial Conduct Authority pricing regulations which will be enforced from 1 January 2022.

From that date, car and home insurance firms will be forced to stop their long-standing practice of offering new customers far cheaper premiums than existing ones. 

Although many customers shop around for their home and motor insurance every year, those who don’t have effectively been charged a ‘loyalty penalty’ for remaining with the same firm.

But the new rules mean that the premiums offered to those renewing a policy cannot be greater than the price they would charge to an equivalent new customer, for the equivalent policy.

While the regulations are designed to stop existing customers from being penalised for loyalty, insurers may then choose to increase premiums for new and existing customers from January to make up the difference.

Compare the Market also found that the cheapest quoted premiums fell to £537 between September and November; a £68 drop year-on-year. 

This means drivers could have saved £102 by shopping around for the cheapest deal.  

The average premium for drivers aged under 25 stood at £1,205, but the comparison site said they could typically save £298 by shopping around and switching. 

While £640 was the lowest average premium recorded in the September to November period since 2014, the average car insurance premium has started to increase.

It was £622 in August, Compare the Market said, but increased to £689 in early December. 

While this is a typical seasonal trend, the usual subsequent decline in premiums in January may not happen this year if insurers decide to stop discounting due to the new regulations.

You can still save on your car insurance

While the cost of premiums is likely to go up for many the next time they renew, there are still steps drivers can take to make sure they are getting the best possible deal.

Ursula Gibbs, director at Compare the Market, said: ‘It looks like insurers have been keeping premiums lower as part of a clever pricing game to try and lock in as many customers as possible before new regulations are introduced in January.’

But she added that motorists should not auto-renew without shopping around first, as there was a chance switching their deal could still save them money. 

‘While the rule changes should end the loyalty penalty, this does not mean that auto-renewing your insurance will get you the best deal,’ she said. 

‘People should be careful not to fall into any traps as insurers may decide to hike premiums for a large number of customers if they can’t charge existing customers more. 

‘However, the size of any price increases for motor insurance may be limited if more Omicron travel curbs come into force.’

Gibbs added that planning ahead could also help customers cut the cost of their car insurance bill.  

‘One of the best ways to beat any potential price increase is to switch early,’ she said. 

‘You could save more than £300 on car insurance by shopping around roughly 20 days before your renewal, rather than leaving it to the last minute.’