The rising price of used cars is leading to an increase in the cost of insurance claims, according to one leading insurance group.
Direct Line said that soaring values on the second-hand market were having an unexpected knock-on effect on bills when a car was written off.
In a trading update the insurer, which provides cover for around four million motorists, revealed that claims inflation this year was “slightly above” its predicted 3% to 5%.
It said this was due to the higher market value of second-hand vehicles, which meant that when a customer’s car was written off the replacement cost - based on that market value - was higher.
Used car prices have been rising sharply for most of 2021. In its latest update Auto Trader revealed that year-on-year the average used car price was up 27% due to strong customer demand and limited supplies.
Demand has increased partly due to more people choosing to use private vehicles instead of public transport and partly due to major problems in the new car market, where a global semiconductor shortage has led to huge wait times for some cars.
As a result, many new car buyers are believed to have switched their attention to the used car market. In some instances, nearly new versions of cars are selling for more than their original price because dealers cannot supply brand-new cars.
Despite this increased cost, car insurance bills have fallen by 7% this year, according to the Association of British Insurers, and are at a five-year low of £429 on average.
However, Direct Line warned of a “volatile” start to 2022 as insurers adapt to new rules designed to end the “loyalty tax” which sees renewing customers pay more for their policy each year.
Under the new regulations, which come into force on 1 January, insurers will be banned from charging existing customers more than new customers for the same policy and new restrictions on policy auto-renewal will also come into effect.