Insurers have denied that motor rates will soar by 25% this year, as stated in a report from market analysts Datamonitor. Market leaders say the figure is wide of the mark, even though substantial price hikes are necessary to improve underwriting profits and counter rampant claims inflation.

Norwich Union, which has 26% of the market share, said 15% would be a more realistic figure. And Direct Line, which has around 9%, said it had no intention of increasing premiums by “anywhere near that amount”.

A Direct Line spokesperson said: “The boom-and-bust cycle of the insurance market suggests that we are coming out of a period of cut-throat price wars but our advice to customers is to shop around – there are still good deals to be had.”

The insurance industry has suffered from rising claims costs in recent years due to normal accidental damage claims, as well as the rise in compensation payouts. Changes to rules on how to calculate final payouts and the emergence of “no win, no fee” litigation have stoked claims inflation.

Uninsured drivers also contribute to price hikes. According to Datamonitor, the UK has the worst record in Europe for uninsured drivers – at least 1.5 million drivers take to the road without insurance, leaving about one in 20 vehicles without cover.

As a result, honest drivers have to pay an extra £30 for their motor cover. Motor insurance has been highly competitive in the past few years as a combination of consolidation, the impact of internet and telephone insurers and the arrival of new insurers such as supermarkets took their toll.

The price war, which started in 1995, saw premiums slashed and insurers taking losses to increase their market share.

But the total value of claims increased from £5bn in 1995 to £6.6bn in 1999, while the cost of the average case went from £1,082 in 1993 to £1,580 in 1999.

Rising prices have followed a period of shake-up in the industry, through series of mergers and acquisitions. Now 73% of the market is held by the top ten insurers, including CGNU, Royal & Sunalliance, Axa, Zurich and Cornhill.

The larger groups which emerged are now trying to claw back costs – between January 2000 and January 2001, premiums increased by almost £100.