The increases, as high as 50% a year for some companies, add to pressure on rental firms to increase rates, following a savage fall in used car values in the past two years which wiped millions of pounds from the value of their rental stock.
Consolidation in the insurance industry along with a smaller appetite for the risks associated in serving the rental market is only partly to blame.
Insurers also face rocketing damage claims for personal injury and replacement vehicles and charges from the NHS for treating non-fault accident victims.
Hospitals can recover hundreds of pounds a day for treating accident victims and have become much more effective at charging since the introduction of a centralised collection service in April 1999.
This coincided with a Law Commission ruling that the NHS should have the right to recover its costs in all cases where a personal injury compensation payment was made.
The hospital fees are paid by the insurer of the guilty party in a road traffic accident, and are placing serious inflationary pressures on vehicle insurance premiums.
In the first year of operation, the NHS compensation recovery unit brought in £26.4 million, rising to £67 million in 2000.
Bolton Agnew, managing director of Practical Car and Van Rental, said charges of £400 per day per person for hospital stays were pushing up insurers charges. Practical is self-insured, although it is covered for large third party legal claims.
Agnew said: 'We have had to increase insurance rates for our franchisees by about 35% in the past year. The insurance issue is creating a huge need for an increase in rental rates.'
Mark Brandom, operations director for Thrifty Car and Van Rental, agreed that costs were escalating significantly because of insurance.
He said: 'Part of the problem is that there are far fewer insurers. A lot have pulled out of the market because of consolidation. Covering the rental market is also a relatively high risk area.'
Thrifty covers the cost of repairs to its own vehicles, but insurance premiums to protect itself from third-party claims have rocketed by 100% in the past two years, leading to an overall increase of 60% in its insurance costs.
Brandom added: 'It should translate to an increase in rates, but the market has been very competitive, so it is difficult to pass the increases on.
'As an industry, we should be increasing rates, because we are absorbing these additional costs so they are not translating to additional costs for the end user.'
For fleet managers, the most immediate impact may be an increase in the excess they must pay before insurance cover limits their liability, according to Jim Noble, operations director for Target Vehicle Rental.
He added: 'The amount of excess differs according to the vehicle, but it has increased along with the crash damage waiver rate. Even if a fleet has its own insurance cover, a premium still has to be paid to cover other risks and that has increased as well. Daily rental companies have faced increases across the board.'
Smaller rental companies and new start-ups are most likely to suffer from the insurance hike, as it could discourage entrepreneurs from attempting to enter the rental market.
Brandom added: 'The market is certainly difficult for new entrants now. From a franchise point of few, we can benefit, because companies that are currently independent are looking to join a network to minimise their exposure to rising insurance rates.'
This may not be true in all cases, however, if companies manage to persuade insurers that they present a low insurance risk.
Specialist prestige rental firm City Inter-Rent, which has more than 100 vehicles in its fleet, has been hit with insurance increases of 20% each year for the past three years. However, it expects that a low claim rate and effective risk management could reduce its costs next year, despite continuing expansion plans.
This is a rare positive note and Agnew is expecting an increase in inquiries from independent firms looking to join its network.
The firm is also working on an internet-based system, called RIVAL to streamline insurance payments for rental vehicles and reduce risk.
Rental counter staff will have to enter the renter's details into the system, based on identification such as a driving licence, and this will be cross-checked online against credit records and a bad hirer's database before insurance is granted.
At London Car Rental, which has four locations and 180 vehicles, the pressure on profits is intense.
Salim Vassi, managing director of the firm, said: 'We had a brilliant last year in terms of claims, but our insurance went up 37%. We had no choice but to pay it, because only one or two firms are available in the market.
'It is a nightmare, because we can't pass the cost onto customers, as that would make us uncompetitive. We have increased the excess in our rental contracts and sell extra insurance to customers.
'It is extremely difficult however, when the multinational firms are offering cars for less than £10 a day. They aren't making a profit and they are skewing the market. We have considered moving to a franchise, but don't know what decision we would make yet.'
According to VELO Rental Management, part of the problem for rental companies is the type of drivers who take up their insurance.
Colin Beare, head of rental and fleet services, said: 'The vast majority of fleets tend to have their own insurance arrangements already in place in a cost-effective package. Customers who opt for the rental firm's own insurance tend to be occasional business renters, who may be a higher risk profile.'
Rosemarie Spiers, director of Aon Rental Business Services, said the crisis for rental firms could force some to ban particular drivers from booking rental vehicles. She said: 'The market is quite volatile, because the customer does not have direct financial interest in looking after their car.
'For rental companies with what can be called a good risk liability we have seen a 5% to 10% increase in their insurance costs, because of issues such as claims from the NHS.
'Part of the problem stems from several years ago when competition meant premiums were very low. For insurance companies to catch up and charge profitable rates, large increases are needed.
'Future strategies for rental companies will have to involve managing the risk that they are putting through. This could mean cutting out certain age groups, certain vehicles and types of customers. That is really the area where they can have the biggest effect.'
Rental firms will also need to tackle fraudulent customers who steal vehicles, she added.
Spiers said:'This down to effective staff training to help rental firms make well-informed decisions on who they are going to deal with or not.'