NORWICH UNION is to increase car insurance premiums by about 16 per cent over the next year in a move which is likely to be copied by the rest of the industry. Many people have joined Norwich Union following its high profile "Quote me happy" TV advertising campaign depicting delighted customers finding out how much they can save.

In the past stiff competition has meant that insurers have had to keep premiums low, but there is a new mood in the industry that this is no longer sustainable.

"We have stuck our head above the parapet, but you can expect to see the market following our lead," said an Aviva spokesman. "We may lose some market share, but the key is profitability."

Annette Court, head of Royal Bank of Scotland Insurance, agreed that current prices were unsustainable and needed to rise, but she declined to comment on whether RBS, the UK's largest motor insurer through Direct Line and Churchill, would lift rates in the near future.

Norwich Union, which has about 12 per cent of the UK motor market, said earlier this month that it expected widespread action on motor policy prices to the consumer as the cost cycle neared the bottom and insurers tried to improve profits.

The increases for Norwich Union customers will range from six per cent for policyholders who have a good claims record to 40 per cent for high-risk drivers.

Analysts believe that Internet players such as esure, which have a lower cost base, might gain market share if the major players push up rates significantly.

The £12bn motor insurance industry has become increasingly tough over the past few years as players fight for market share, but there is a belief that companies can no longer afford to make a loss.

Consultancy EMB said the market is likely to make an overall loss this year, paying out £113 in claims and expenses for every £100 taken in premiums.

Norwich Union said it was not the cost of repairs, but the cost of compensation to third parties following accidents, which can run into millions of pounds, that was hitting insurers hard.

The company, which employs 5,000 people in York, Sheffield and Leeds, said last month that underlying group profits had climbed 27 per cent to £1.7bn.

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