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If you're due to purchase or renew an insurance policy, expect a leap in premiums, as rates have reached record levels according to figures published by the AA today.

Fraud and compensation claims fueled a huge hike in car insurance premiums by a third during 2010, so are prices set to rocket further?

The AA's British Insurance Premium Index shows that car insurance premiums jumped by 6.4% during the last quarter of 2010 alone: adding £51 to the average cost of an annual comprehensive car insurance policy. The typical cost of a home insurance buildings policy also rose by £10 or 7.7% over the quarter to £143, while premiums for contents cover fell marginally to £72.

We're told to always shop around before accepting renewal quotes yet the AA found that the average 'shoparound' premium rose by a third (33.2%) through 2010, meaning that, on average, drivers who shop around for their cover can still expect to find that their premiums have increased by around £210.

Young drivers hit hardest
These rises are less than the previous quarter, yet represent bad news for hard-pressed motorists, coming on top of fuel duty and VAT increases in January, as well as a 1% increase in Insurance Premium Tax. However, the AA believes that this marks the beginning of a slow-down in price rises.

Although comprehensive premiums have risen for everyone, young drivers have suffered the brunt of the increases, with 17-22 year olds seeing premiums rise by 15.1% (more than 5% per month) and by 58.3% over the year, to £2,251.

Third party, fire and theft insurance, most commonly bought by young drivers for old cars, is being offered by fewer and fewer companies and can be more costly than comprehensive cover. It rose 71.9% over the year, to £1,390. Some insurers are also refusing to cover young male drivers in a bid to cut costs.

Compensation culture
Simon Douglas, director of AA Insurance, says: "There has been no let-up in premium increases as insurers struggle against losses from 2009, when for every £100 taken in premiums, £123 was being paid out in claims. This has led to the biggest annual premium increases we have seen since the AA Index began in 1994."

The sharp rises recorded by the Index prompted a House of Commons Transport Committee inquiry into the car insurance market. "MPs at the inquiry learned premium increases have been fuelled by fraud; injury claims; exaggeration of claims; organised 'cash for crash' scams; uninsured driving and poor investment returns because of the recession," adds Mr Douglas. "A sharp growth in the number of accident management and personal injury claim firms has helped to develop a hard-sell system in Britain that encourages people to claim, even if they have not suffered an injury."

According to the Association of British Insurers, there are 108 fraudulent motor insurance
claims detected every day, amounting to a combined value of £1.12million, which Douglas believes is 'just the tip of the iceberg'. He adds that some estimates put the cost of fraud at £80 for every honestly bought car insurance policy.

"I hope that as a result of the inquiry, the Government is able to help the motor insurance industry stem haemorrhaging costs. Swiftly introducing the Jackson reform of rogue accident management firms and increasing police resources to help tackle insurance fraud would be welcomed," Douglas says.

Cost cutting
The AA points out that some insurers have taken cost control to the extreme, by exiting the car insurance market altogether, while others are becoming increasingly choosy in the risks they underwrite. "For example, more than half of insurers will no longer insure young drivers and many are also withdrawing TPFT cover. As a result, premiums for them have risen to a point where they are becoming unsustainable," explains Douglas.

"Although young male drivers are ten times more likely to have a car crash than older drivers, it is nevertheless important that the industry finds ways to help young people start their driving career safely, responsibly and affordably."