ONE in seven motorists will see the cost of their car insurance rise by up to 35 per cent after Britain’s second-largest motor insurer revealed plans to shed unprofitable business.

Simon Machell, the chief executive of Norwich Union Insurance, told The Times that he planned to implement rises ranging from about 6 per cent for valued customers to well over 30 per cent for high-risk drivers such as young men.

The average NU customer will be hit with a 16 per cent increase in premium, a huge rise in the fiercely competitive motor insurance market, where price is considered the most important selling point.

Mr Machell said that NU hoped that other insurers would follow suit to put a stop to the price competition that was ruining the profitability of motor insurance.

Mr Machell said that NU was ready to lose market share if customers rejected the price rises. The insurer covers one in seven UK motorists. “We hope others will follow us, but if they don’t, we’re prepared to lose some volume in order to get a decent return for our shareholders,” he said.

However, Richard Mason, of Moneysupermarket.com, the financial product price comparison website, said that other insurers were unlikely to raise their prices in response.

He said that business was booming for online motor insurers such as Swiftcover and esure, which were able to continue to undercut blue chip insurers such as NU because their cost base was much lower.

NU has started to inform customers of the price increases, a process that will continue for several months.

Mr Machell said: “The market isn’t making an acceptable level of return. Premiums are static or falling, but claims costs are increasing by between 6 per cent and 10 per cent a year.

“It’s pretty marginal whether the market in general makes a profit on motor.”

Mr Machell said that it was vital that the cost of insurance rose for young male drivers — who had a one-in-two chance of crashing their car in their first year behind the wheel — to reflect properly the risk that they posed. “It’s not the damage to the car that costs us, it’s the injuries to third parties that can run to hundreds of thousands or even millions of pounds,” Mr Machell said.

Insurers have been criticised for encouraging customers to compare policies on price alone, Mr Machell said. “We have to work hard at explaining what else we offer, such as how well you’ll be treated when you make a claim,” he said.

Mr Mason said NU was “finally having to face the fact that people are shopping around and retention rates are falling”.

PRICE-DRIVEN

Top ten motor insurers*

NFU: £348.3m

(*by earned premium in 2005)

Source: EMB

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