The motor market will harden in the new year after the largest UK insurer committed to raising premiums.
Insurance Times has learned that Royal Bank of Scotland Insurance is to introduce gradual rises in rates in a bid to turn the market.
During the past three months the insurer has increased premiums by 5% on all new business.
It is also thought the insurer will add a further 1% to premiums per month for the first six months of 2007.
In a trading statement the insurer said: "Claims inflation continues to impact results, however RBS Insurance is increasing its prices in line with the market, which should be reflected in our results in due course."
A spokeswoman said: "Premium inflation has been outstripped by claims inflation for the past four years. Over the past three months RBS Insurance (RBSI) has been required to increase new business prices by 5% across our key brands in order to mitigate the impact of this claims inflation."
The spokewoman could not comment on further rate increases.
RBSI's move could have a significant impact on the fortunes of the motor market, which has languished in unprofitability since 1994 owing to flat rates.
Experts say that rates need to rise by as much as 10% across the board for the market to turn a profit.
Norwich Union (NU) announced in September that it would bump premiums up to 40% in a bid to boost profitability.
It is understood that NU was disappointed with the speed at which other insurers followed its lead by increasing rates.
The fact that RBSI and NU, the two largest motor insurers in the UK, are increasing rates is likely to encourage other insurers to follow suit.
One leading motor broker said: "NU was a little concerned that other insurers weren't shouting about putting up rates.
"We are happy to see RBSI raising premiums, it will certainly reinforce NU's position and will be good for the motor market."
Royal & SunAlliance (R&SA) is also believed to be preparing to follow suit. R&SA declined to comment.
