July 19 (Bloomberg) -- U.K. car insurance premiums climbed at least 12 percent in the second quarter, the fastest rate on record, after rising claim costs and low investment returns squeezed insurers’ profits, the Automobile Association Ltd. said.

Comprehensive car insurance, which includes damage to one’s own and other drivers’ vehicles, increased 12.1 percent to 980 pounds ($1,507) in the three months to June 30, the AA said today in a statement. Third party, fire and theft cover, typically bought by younger drivers, rose 15.8 percent to 1,225 pounds.

“Many people who may not have bothered to make a claim for minor or even non-existent injuries in past accidents are being encouraged to do so by unscrupulous accident injury claim lawyers,” Simon Douglas, a director at AA Insurance, said in the statement.

Insurers including Aviva Plc and Royal Bank of Scotland Group Plc-owned Direct Line, the U.K.’s two largest motor insurers, are raising prices as record low interest rates have cut insurers’ investment returns, hurting profits. Car rental costs and lawsuits have raised the overall cost of claims to 22 percent more than insurers take in premiums, making the industry unprofitable, according to the AA.

“Insurers have been making huge underwriting losses,” Douglas said. “I won’t be surprised if, by the end of 2010, we’ll have witnessed an unprecedented 50 percent rise in just two years.”

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