A Warning of a motor price war is looming after a dramatic slowdown in rates over the past three months has come from the AA quarterly British Insurance Premium Index.

The AA said comprehensive motor rates “have made their first dramatic slowdown – with rates up just 0.89% over the past three months. The last time comprehensive rates rose by less than 1% over a quarter was April 1996.”

However, year-on-year average comprehensive premiums are up 15% from £561.24 this time last year to £645.76 now. But such is the competition in the market that, by shopping around, drivers can cut £224 off this average, a saving of more than 29%.

Non-comprehensive rates are up 2.5% over the past three months, but by shopping around, motorists can save more than 45%.

Falling margins are also contributing to the squeeze on insurers, the index reveals. AA Insurance Services managing director Kerry Richardson said: “Contrary to recent reports, slowing price rises suggest that the market is set for a price war over the coming months.

“With new entrants launching this summer, and marketing campaigns by the big insurers, all the signs would point to a battle for customers on the horizon.”

Richardson believes this could put a further squeeze on internet-only insurers, who may not be able to survive a price war.

Direct Line spokesman for motor Dominic Burch agreed that the AA could be right, pointing out the recent demise of online broker Screentrade. He added: “However, our internet site is fully integrated with our main business – we are not a stand-alone site.”

Burch said many internet-only providers did not have a big brand name and, in a tight market, this could squeeze them.

Currently Direct Line has 30% of the online market, with 135,000 of the estimated 400,000 motor policies that went on risk via the internet last year.