The cost of pretty much everything is rising, from bread to bills. But are you finding that car insurance premiums seem especially high? Don’t worry, you’re not imagining it.

The Association of British Insurers (ABI) recently revealed that the average price paid for motor insurance rose by 8% during Q4 2022*. That takes the average policy to a hefty £470 a year.

So why have car insurance premiums gone up?

Providers are dealing with a perfect storm of cost hikes that are higher than inflation. We take a look at some of the main causes below.

Rising energy costs

As is the case with many industries, energy-related expenses are pushing up costs.

When it comes to car insurance, this is especially true, as garages are passing on their higher energy bills. These businesses didn’t qualify for government support so they had to absorb the full brunt of surging prices. As a result, insurers have to pass on these higher costs too. The ABI data showed that the average cost of each repair increased by £71.75 since Q4 2022*.

Parts are more expensive

The costs of raw materials, such as paint and metal, are also rising at rates above overall inflation. So insurers have to pass on these increases in premiums.

The short supply of semiconductors and microchips is another big factor behind why car insurance is so expensive at the moment. These account for around a third of the cost of modern vehicles and are in short supply worldwide. Shortages tend to mean rising prices. Insurers are also having to provide customers with courtesy cars where parts are taking longer to arrive.

Second-hand car costs rising

The expense to an insurer of providing customers with courtesy cars is then pushed up further by second-hand car costs.

Auto trader’s Retail Price Index showed that the average price of a used car increased by an astonishing 32% year-on-year in March 2023**. Again, these hikes get passed on to the customer.

It’s also becoming more expensive to insure a second-hand car because they’re worth more.

How to reduce car insurance costs

There’s not much you can do about the overall rise in car insurance costs, but you can ensure you’re getting the best deal.

  • Shop around – this is generally the easiest way to save money on your car insurance. Make sure you compare your options rather than simply auto-renewing.
  • Enhance security – installing alarms, immobilisers or other security devices could help you get a cheaper premium.
  • Limit your mileage – if possible, consider cutting down the amount of miles you cover. This lowers the risk you pose to an insurer, reducing your premium.
  • Consider buying add-ons as separate products – you might assume it would be cheaper to include add-ons to your policy e.g. courtesy car cover or windscreen cover. In reality, it may be cheaper to purchase them alone, so always double-check.
  • Think twice before adding another named driver – while adding a safe and experienced driver can bring premiums down, be aware that the opposite can also be true.
  • Consider a telematics policy – if you’re confident you’re a safe driver, having a black box fitted could help reduce your premium. It can also act as a tracker if your vehicle's stolen.
  • Pay annually – if you’re in a position to do so, paying annually for your car insurance can save you money.

Don’t forget to check customer reviews too. It’s important to find a policy that isn’t just the right price, but the right fit for your circumstances. The cost of living crisis means many people will currently buy on price alone. But it's important to see whether existing policyholders have had a positive experience first.