MOTORISTS renewing their car insurance this year are set to pay the price for a big jump in personal injury claims and a recession-fuelled rise in fraud.

Royal Bank of Scotland, which owns Direct Line and Churchill and accounts for around 30% of the market, announced a steep increase in claims in third-quarter results last week, although this went largely unnoticed due to the focus on the part-nationalised bank’s recovery prospects.

The bank’s insurance arm registered a 22% rise in personal injury claims against its drivers over the period – which in turn forced it to set aside an extra £118m for claims and virtually wiped out profits in the division.

Ominously for drivers, RBS said it had taken “significant action” to mitigate the sudden surge in claims – including price hikes.

And eye-watering car insurance premiums are fast becoming the norm, according to the AA motoring organisation.

Its latest quarterly figures show average premiums for comprehensive motor cover jumped by 5.6% in the three months to the end of September – the biggest increase since the AA first started monitoring the market in 1994. The annual rate at which the cost of the cover is rising also hit a new high of 14%.

According to figures from the Department for Work and Pensions’ Compensation Recovery Unit (CRU) – which registers all personal injury claims – the number of claims made against motor insurers shot up 13% to 625,000 in 2008/09.

Add in more incidents of motor insurance fraud, dwindling investment returns for the companies due to lower interest rates and stock markets – as well as higher legal bills – and it all makes a perfect storm for insurers and their drivers.

The Association of British Insurers (ABI) has been fighting a campaign to reduce the legal costs incurred by the sector for handling personal injury claims.

Spokesman Malcolm Tarling said: “One of the key concerns is not the amount of money paid out in claims, it is the legal costs – the disproportionate amount which is paid out in fees.”

The ABI comes out with some sobering statistics on personal injury claims and the costs incurred by its members. It says the industry pays out 43p in legal costs for every £1 paid in claims – but for claims below £5,000, this can rise to a whopping 88p in average costs.

Overall, around 10% of all premiums go to the legal profession – mainly drummed up by personal injury claims specialists business.

“What you do not expect is legal costs being the size they are for dealing with claims which are pretty small and pretty simple,” Mr Tarling adds.

New plans to streamline the system are coming into force in April. These apply to personal injury claims between £1,000 and £10,000 – or around 80% of all claims.

The ABI hopes that this will reduce the average time taken to deal with personal injury claims from two years to around six months.

The ABI and the Association of Personal Injury Lawyers (APIL) demur at the suggestion the UK is becoming a nation of “ambulance-chasers” because of the recession – although the steep rise in overall claims registered by the CRU data in the past year might suggest otherwise.

APIL chairman John McQuater said his members were competing more strongly for market share, but warned against reading too much into one year’s figures. The organisation also hopes the new compensation arrangements will “deal with things at an appropriate cost”.

Meanwhile, evidence of the surge seen at RBS has not necessarily been apparent among competitors so far, City experts say. Numis analyst Nick Johnson said: “The comments from Admiral have been fairly reassuring – they are seeing a decrease in claims frequency due to better road safety. The other thing (Admiral) commented on is that recession is leading people to drive less, leading to a positive impact on claims.”

Both the AA and the ABI, however, attest to a sharp increase in fraud over the past year – adding to a 15% rise in claims for car theft, as more expensive models become the target of criminals. Motor insurance fraud detected by ABI members in 2008 reached £360m, with overall fraud costing £1.9bn, compared to £1.6bn the previous year.

There has also been a rise in the number of uninsured cars on the road to around one in 20 motorists without cover to save money, with 185,000 police prosecutions last year for the offence seemingly little deterrent.

Police add that criminal gangs staging “crash for cash” bogus crashes are cheating insurance companies out of more than £350m every year.

In recession, insurance fraud is always a big riser because it seems to be a victimless crime, while more people may be more tempted to make personal injury claims in a downturn by the prospect of a mini-windfall in tough times.

But, in reality, the victims will be the vast majority of the owners of the 28m cars on the UK’s roads charged more for the privilege by insurers.