The £9bn-a-year motor insurance industry is expected to see claims and expenses pay-outs of £109 for every £100 of premiums taken in 2005.

While insurers offset underwriting losses by investing the premiums, current predictions are that that investment returns will not be enough to cancel out the deficit.

Although results from the big insurance companies for 2004 show the profitability of motor insurance policies has been fairly good, this masks the fact that the industry got off unusually lightly on claims on policies bought in previous years.

Such prior year adjustments were at their best level the industry has seen for 20 years and more normal conditions seem almost inevitable this year.

The increasing litigation culture has for years fuelled ever rising courtroom awards for liability and injury cases. Claims are increasing by between 8% and 10% a year while insurance premiums are rising by 2% to 3%. That means premiums must rise at about 5% just for the company to stay still.