Car insurance costs 'to fall by 10 per cent': Hidden 'subsidy' in premiums removed

CAR INSURANCE will be as much as 10 per cent cheaper this year because of companies pulling out of the knock-for-knock agreement, AA Insurance has claimed.

Under the agreement, each car in a collision would be repaired at the expense of the company with which it was insured, regardless of which motorist was to blame.

Mark Wood, managing director, said: 'The fall in comprehensive rates, at the relative expense of third-party premiums, is due in part to the changes in knock-for-knock. Comprehensive policyholders no longer subsidise non-comprehensive policyholders.'

Guardian,formerly GRE, is the latest insurer to withdraw from the agreement because of competition from direct insurers such as Direct Line.

Keith Lugton, head of communications at Guardian, which insures 500,000 cars, said that the agreement had forced up the cost of comprehensive insurance by about 20 per cent a year.

The direct insurers offer almost entirely comprehensive insurance, which meant they were able to offer it at a much more tightly priced rate. From now on Guardian will look at each claim to decide who is legally responsible for the accident. The company's existing knock-for-knock agreement will apply to accidents before the end of March. Guardian's move means that there are very few insurers still operating knock-for-knock.

General Accident and Norwich Union both withdrew last year. Norwich Union, which insures about a million cars, pulled out in July. Derek Plummer, marketing manager, said that at the time they were able to offer a one-off premium reduction of up to 15 per cent. Mr Plummer said: 'Knock-for-knock has had its day.' He said that even before Norwich Union had pulled out it was settling about 35 per cent of its claims outside the knock-for-knock agreement.

He said that the company now used a formula approach to settling claims where different insurers agreed about the apportioning of blame under a series of standard accident conditions.

Commercial Union and Cornhill are among the few insurers still operating a knock-for-knock agreement.