Motorists who remember the hefty insurance premium hikes of a couple of years ago can afford to be a bit more optimistic now. The average cost of comprehensive cover is currently £682, according to the AA's British Insurance Premium Index. This is an increase of 'just' 5.62% over the past year.

On non-comprehensive cover, the average premium stands at £800 - up 5.04%. The average non-comprehensive policy is more expensive than fully comprehensive because the people who opt for it tend to be higher-risk drivers.

The outlook over the next few months is for rates to continue to climb, but at a slightly lower rate of perhaps 3% to 4% for comprehensive, according to motor insurance expert Nigel Munns of B&W Deloitte. "We are moving into a much more modest level of premium uplift," he says.

New entrants - particularly HBOS's recently launched venture Esure - have kept competitive pressures up in this extremely price-sensitive market.

The AA - an intermediary which searches for cheap premiums for its customers by checking rates across a panel of insurers - comments: "Car insurance premiums are showing clear signs of stabilising."

With about 30 million cars in the UK, motor insurers wage a constant battle for market share. The sector has often swung between price war and hefty increases. Some general insurers have sacrificed profits in this market in the past in return for volume.

But Colin Batabyal, technical director of Esure, does not expect many players to take this cross-subsidy route in future: "Life and pensions were often used to subsidise motor insurance by the insurers. But with the new focus that there now is on life and pensions, this market will become far harder to operate in."

Last year saw the most expensive motor insurance claim ever - the £50m paid out after the Selby train crash. Reinsurance rates went up significantly at the start of 2002 - both in reaction to Selby and to September 11.

Other long-term trends will continue to fuel premium increases. "The claims cost keeps going up," says Munns. "This is nothing to do with accidental damage. It is driven out of bodily injury. We are seeing more bodily injury claims, and they are settling for far more."