Examination of Witnesses (Questions 1-90)
Chair: Good morning, gentlemen,
and welcome to the Transport Select Committee and our inquiry.
Could you identify yourselves please for our records? Could you
just give your names and the organisation you are representing?
I will start at this end with Mr King.
Edmund King: Thank
you. Good morning. My name is Edmund King. I am President of the
Automobile Association.
Will Thomas: Good
morning. My name is Will Thomas and I am Head of Car Insurance
at Confused.com.
Dr David Brown:
Good morning. My name is David Brown. I am Chair of the Institute
and Faculty of Actuaries Working Party on Third Party Motor Claims.
Duncan Anderson:
My name is Duncan Anderson. I am a partner in EMB Consultancy
LLP, a firm of consulting actuaries.
Q1 Chair: Thank
you. We have received a lot of evidence for this inquiry, including
some very interesting evidence from all of you. It appears that
the cost of motor insurance has rocketed through a combination
of aggressive marketing by claims management companies; escalating
legal costs, including the issue of referrals; fraud and collusion;
uninsured driving; and the escalating costs of personal injury
accidents. That is quite a combination. Which of those matters
is the most important and who do you feel is responsible for this
situation? Mr King, could you help us?
Edmund King: I
look at this from both sides. From the consumer side, the AA represents
some 15 million motorists. We are also an insurance broker and
we have a driving school. I think there are two sides. There is
one to look at it from the industry side, which most of the evidence
seems to reflect, but also from the consumer side the big worry
is that since having relatively stable insurance premiums probably
until about mid-2009 we have seen a rapid increase. Over the last
12 months in particular the AA's insurance premium index shows
increases generally of about 40%, but for young drivers it is
51%.
I think from the consumer point of view this is pricing
a lot of young drivers out of the market; the insurance premiums
are costing four or five times the cost of their vehicle. This
has effects on road safety and deaths on the road because what
it means is that young drivers generally cannot afford the newer,
safer vehicles. A lot of improvements have been made over the
last 10 years, particularly with the Euro NCAP crash test programme,
which means that newer cars today are 10 times safer than cars
of 10 years ago and yet the majority of young drivers have cars
over 10 years old.
Q2 Chair: But
what are the major reasons for the general escalation of cost?
We hear about aggressive marketing and escalating legal costs
where the payments to the legal profession are almost as much
as the payments for personal injuries. We are told there is fraud
and collusion and uninsured driving. What is the main driver for
this increase?
Edmund King: It
is a combination of personal injury claims that have escalated
in this country much higher than in other countries—even
Scotland, Ireland and Germany, where they have restrictions on
claims for whiplash or restrictions on the limits. Those have
escalated and that puts up premiums.
Also alongside that, there is fraud as well
as part of personal injury: the so-called "cash for crash".
Staged accidents are becoming more commonplace, where a car in
front will stop suddenly and the car behind it hits it. There
will be a witness there who is compliant with the people in the
first car. They will then all make claims for whiplash. This is
going on. It is helped by aggressive marketing by some of the
personal injury management companies. Colleagues of mine at the
AA who've had minor crashes two or three years ago have had telephone
calls out of the blue suggesting that they may wish to make claims
when they weren't even injured. This is obviously going on and
this is pushing up premiums.
I think fraud is a major factor and, of course,
with young drivers it is still about level of risk. Young drivers
are 10 times more likely to have an accident in their first year
than a 30 or 40-year old driver and therefore there is the likelihood
of having that accident. Then there are the costs of the claims.
If a young driver is scarred for life, it costs something like
£3 million in insurance. If they are put in a wheelchair
it might be £19 million. So there are large costs for the
insurance companies. We do have to address how we can reduce the
number of accidents involving young drivers. There is a lot around
education and enforcement around that.
Q3 Chair: Do any
other witnesses want to give their views on the major reason for
the very big escalation in the cost? Premiums almost doubled from
1997 to 2001, were stable to 2005, and then have doubled again,
and we are up to enormous figures. Would anyone like to give me
a view on the major reason for this? We have heard about aggressive
marketing, about fraud, about legal costs. What is the real driver
for this increase?
Duncan Anderson:
I think I would like to add to what the AA said. It is certainly
the case, in my view, that the main driver of the increased claims
cost is the increased cost of bodily injury claims. Until relatively
recently, there was not that much data in the public domain across
the whole industry. Now the Institute of Actuaries Working Party
has pooled data to make it clear that across the industry there
is very much an increase both in the number of bodily injury claims
and the average amount of such claims. I think that is one of
the key drivers, and my view would be that it is the claims-farming
culture, the referral fees and the claims management companies
that are behind that.
But there is a point I would like to add to
this as to why we've seen such a relatively dramatic increase
recently, in the last year, and I concur with the AA's views based
on the EMB-Confused.com Index: we see increases of around about
37.5% and even more for third party cover. There is a higher increase
at younger ages because younger drivers have a higher propensity
for bodily injury claims, and so if such claims are increasing
at a high rate proportionately the younger drivers will receive
a higher increase. So for young men there is maybe a 44% increase
in premium in the last year.
What I would like to say, though, is that during
2007 and 2008, rates were relatively stable. In fact, during 2007
and 2008 there was almost no increase in the average motor insurance
premium. I think one extra factor to throw into the mix is that
the distribution of motor insurance in the UK has undertaken a
little bit of a revolution in recent years with the introduction
and the increased popularity of comparison websites. It is now
very easy for consumers to compare across many different insurers
and select the cheapest premium. What that did for a year or two
was to suppress the increases in motor insurance rates that might
normally have been put through whilst insurers got their minds
round how to deal with this revolution.
Q4 Chair: Is there
any proper regulation over those comparison websites? Are they
comparing like with like or are they misleading?
Duncan Anderson:
There is regulation, I guess.
Q5 Chair: I am
going to ask Mr Thomas.
Will Thomas: Absolutely.
We are regulated under the Financial Services Authority and we
have an honest and open relationship with them. I think regulation
improves any industry that it is engaged with and we welcome any
further recommendations from the FSA regarding that.
Q6 Chair: But
we have received evidence that suggests that those websites encourage
people not to give full disclosure of their situation and may
not always be comparable in the claims that they make. Have you
received any complaints about that?
Will Thomas: With
regards to Confused.com, we ask every single question that could
be asked to a customer going through a car insurance quotation.
We accurately represent all that data across to our third-party
providers, which are insurance companies. We have to accurately
represent, when the prices are brought back, the customer's circumstances
and that nothing has changed; no assumptions are made at all.
Q7 Chair: But
you are not aware of complaints about the way those sites operate?
Will Thomas: Not
at all. I think that there is—
Q8 Chair: You've
never had a complaint?
Will Thomas: We
don't have complaints about our own accuracy due to the fact that
we ask a comprehensive set of questions to accurately map the
client's risk across to our insurance providers.
Q9 Chair: Are
you aware of any problems with any other similar websites?
Will Thomas: I
am not aware of any, but I know for a fact that Confused.com has
always asked 100% accurate questions and we've always passed that
risk on.
Q10 Chair: Dr
Brown, from the actuary's point of view are we going to anticipate
continually rising premiums?
Dr David Brown:
I think it is more likely than not. The indicators of the inflation
that has been seen and the costs of bodily injury have been fairly
continuous, certainly over the last couple of years. Some of the
work that we did in the Working Party did establish a link with
the rise of claims management companies.
One of the interesting findings is the geographical
correlation. There are particular areas of the country where there
are a lot of claims management companies, particularly in the
north-west. In other areas of the country there are fewer. High
numbers of claims management companies do correlate with the high
percentage of accidents with a bodily injury component in those
areas. That was how we were able to establish a correlation between
the rise of claims management companies and bodily injury, to
the extent—
Q11 Chair: Could
you just clarify the role of the claims management companies in
escalating—is it the number of claims and the extent of
the claims? How is this operating? Why did you say it was the
north-west particularly?
Dr David Brown:
It is kind of both. If you go to page 10 in the presentation attached
to the submission that you have, you have a chart which shows
the geographical hotspots. The north-west is a particular one.
I think it is really interesting that in the north-west 40% of
accidents do have a bodily injury component, whereas across the
whole of the country that is 25%. The north of England is generally
high, but the north-west is particularly high. London is—
Q12 Chair: Do
you think that that reflects the activities of the companies rather
than the incidence of accidents?
Dr David Brown:
Definitely, yes, because there has been a drop in accidents. The
general context in the UK is that there have been fewer and fewer
accidents indeed over the last couple of years involving third
parties[1] and third-party
vehicles as well. It is definitely an increased propensity either
for bodily injury or to make bodily injury claims.
I think the influence of the claims management company
would potentially be in two things. We have observed an increase
in the frequency and we have observed an increase in the amount
of individual claims made. In terms of the frequency, arguably
it is that people are making claims who did not make them before.
There is a question as to the extent to which that is simply people
exercising their right to make a claim that they always had the
right to make but were not making before.
The second element is the increase in cost that
there has been: an increase in the number of claimants, so the
number of passengers in the third-party vehicle or the number
of passengers in the insured car who are making claims.
Thirdly, there are additional costs which are
potentially the legal costs which go with the claim, so legal
costs making up about 40% of the claim amount. If a referral comes
from a claims management company, that is a referral fee that
is generally paid by a solicitor. A solicitor having it will necessarily
and clearly entail legal costs.
Q13 Iain Stewart:
Just to get some data on the claims management companies, what
percentage of claims are now managed by these companies and how
has that changed over the last few years?
Dr David Brown:
I am afraid we don't have that data. Individual companies may
have it.
Edmund King: What
we can say on that, though, is that the number of claims management
companies has doubled in two years. There are now something like
3,000 claims management companies, so the actual number of companies
has doubled. One would assume that they are touting for more business
as a result of there being more companies.
Q14 Iain Stewart:
What is your best guess on the percentage of claims that are now
managed by these companies?
Dr David Brown:
If you presume that at least half in the areas of the country
that have particularly high exposure to claims management companies,
you have about twice as many bodily injury claims. Certainly in
those areas there would be at least half which are caused by claims
management companies. It is very hard to say in areas of the country
that don't have high densities of claims management companies.
Q15 Iain Stewart:
Just one follow-up question, if I may. You mentioned the north-west
as an area where there is a high concentration. What other parts
of the country have a similar degree?
Dr David Brown:
The north-west is absolutely a hotspot. There is Yorkshire and
the north-east to a lesser extent. London, but not the areas around
London, is a hotspot as well. London is interesting, as I say,
because it's had the strongest growth in claims management companies
over the last couple of years.
Q16 Chair: Mr
Anderson, did you want to add something?
Duncan Anderson:
I was just going to say that London also has the highest increase
in bodily injury claims as well, from a lower base. That is an
interesting statistic.
Dr David Brown:
The other benchmark you can look at is Scotland, of course, where
there are no referral fees and the absence of claims management
companies. There the rates of bodily injury claims that are made
per accident are about 10% to 20%; let us say 15%. That gives
you an idea of the extent of the uplift that comes from that activity.
Q17 Gavin Shuker:
Obviously, insurers will seek referral fees when they pass on
a case to personal injury lawyers. Is there any estimate of what
size of the business that represents or what the average amount
on a referral fee there is?
Q18 Chair: Referral
fees: how much is involved? Could somebody perhaps explain the
process to us on how the system actually works and who benefits?
You are all very shy. Who gets the money? Who does the referring
and who benefits?
Dr David Brown:
There are a number of different parties that will do the referring.
There can be referrals that come from accident management companies
that deal with physical damage. Of the referral fees claims management
companies may pass on an element directly to claimants. There
are referral fees that can be paid to insurers who pass on details
of their own customers who are third party claimants of other
insurers. There are referral fees that can be paid to legal insurers.
Q19 Chair: Who
is doing the paying?
Dr David Brown:
The solicitors, as I understand it. I am sorry, the claims management
companies will receive a referral fee from the solicitor. What
the claims management companies may in turn do is pay others to
source business. So they may go directly to—
Q20 Chair: Is
there a kind of merry-go-round of referral fees that end up being
a charge on the public purse?
Dr David Brown:
That is a strong possibility.
Duncan Anderson:
Not so much the public purse as the insurance premiums.
Dr David Brown:
Yes.
Q21 Chair: So
this is a kind of referrals merry-go-round that ends up escalating
the cost of premiums to the driver?
Duncan Anderson:
That is correct.
Q22 Gavin Shuker:
Just to clarify, you were stating that insurers sometimes receive
referral fees on their own customers—claims that they are
involved with?
Dr David Brown:
No, this would be on third-party—sorry, it would be on their
customers, where their customers are third-party claimants to
other insurers. I have no data from the Institute of Actuaries
on the extent to which that goes on.
Duncan Anderson:
Anecdotally, I would say it is not the major source, but there
is no data.
Dr David Brown: I would agree
with that.
Q23 Kelvin Hopkins:
You must be losing a considerable sum of money from uninsured
drivers—people driving who have not been insured. Have you
any idea how much that might be? For this particular form of
insurance, is there a global sum you might have a feel for?
Will Thomas: The
MIB state that it is around £400 million to £500 million,
which adds about £30 to every honest driver's policy in this
country. We see instances of the fines for driving uninsured often
being dramatically less than the price of a policy in these areas.
With that deterrent being quite small, sometimes you can understand
a young driver—well, you can't understand, but when young
drivers are seeing premiums of £2,000 or £3,000 and
having penalties on average that were paid out in 2008 of between
£200 and £300, the penalty doesn't really fit the crime.
Q24 Kelvin Hopkins:
Indeed. That is my next question; you have anticipated it. My
suggestion is what if uninsured drivers were subject immediately
to their cars being confiscated and crushed, and with a three-year
driving ban or something of that kind? It would immediately have
an effect, but there is also the matter enforcement. It strikes
me that DVLA Licensing is not a problem because the police can
immediately spot a car and check it, but it is more difficult
to do that with insurance. Is there not a way of making it so
that the police can check insurance at the same time?
Will Thomas: I
think that is something that is pushing through in March 2011,
which is continuous insurance enforcement, which is where the
Motor Insurance Database and the DVLA will combine to recognise
cars that are on the road that do not have insurance associated
with them. We believe this will be a great step in reducing the
number of uninsured motorists.
Q25 Kelvin Hopkins:
You also have a scheme, I understand, for compensating insured
drivers who are hit by drivers who aren't insured. That costs
as well, I understand.
Will Thomas: It
does. All insurers pay into that pot and that obviously gets reflected
in people's premiums.
Q26 Kelvin Hopkins:
So targeting uninsured drivers and driving them off the road,
literally, would make a great difference?
Will Thomas: Absolutely.
It would reduce one of the factors that are contributing to increasing
premiums.
Duncan Anderson:
I wonder also if there is an education thing here, which is that
20 years ago, when I started out, bodily injury was 20% of claims
cost and a motor insurance policy was largely about bent metal
and protecting the car. Bodily injury now counts for over half
the claims cost in many cases—particularly with younger
drivers, where it is much more than half the claims costs, so
young drivers actually buy a liability policy. They don't really
buy a property damage policy.
Q27 Chair: When
insurance is being sold over the internet, how much care is taken
on checking the details of the person who wants to be insured?
Mr Thomas, can you tell me what checks are in place?
Will Thomas: Absolutely.
The internet, as we all know, is not the same as face-to-face
or over the telephone. There are steps that we need to do to recognise
that, in times of economic downturn, there is a propensity for
fraud to increase. We recognise this and we are trying to hit
it head-on with our insurance providers. There are things that
can be manipulated potentially, like age, your driving experience
or claims and convictions, and we are working with our insurers
to recognise when this happens so they can determine how they
want to contact or engage with that customer—whether it
be to refuse to quote or that they would prefer to speak to them
over a channel such as the phone.
We also see the use of sharing databases with
the DVLA and the MIB and also those claims underwriting exchange
databases. Really, if we all work together, we can help consumers
and insurers alike because it is not in anyone's interests to
make the consumer misrepresent themselves.
Q28 Chair: How
much checking do you actually do?
Will Thomas: How
much checking do we actually do? This is something that we are
starting to work with our insurers on moving forward early next
year.
Q29 Chair: Does
that mean that you are not doing any checking at the moment?
Will Thomas: The
checking that we do do is on the vehicle details and everything
that is put into the internet is through utmost good faith that
the customer is accurately representing themselves, while insurers
equally—
Q30 Chair: Sorry,
could you just repeat that end bit? "Everything that is put
into …."?
Will Thomas: It
is a process of utmost good faith that consumers—
Q31 Chair: Good
faith. So you take on good faith the information given to you?
Will Thomas: Absolutely,
but we do recognise that there are things that we can do to help
combat areas that consumers might be misrepresenting themselves
through.
Q32 Chair: Which
are the areas do you think that might be?
Will Thomas: There
are instances where we can recognise where people may have done
a quote that had a claim and then it may be removed. We can let
the insurers know that that is the situation so they can decide
how they wish to engage with that customer.
Duncan Anderson:
It is probably just worth saying that identification of this underwriting
fraud effectively can be quite hard. A lot of insurers do use
a lot of external data relating to the individual, to the vehicle,
to the geographical area and to do checks that these people exist
and there is relevant information about these people with vehicles
from external data.
But detecting with accuracy suspicious behaviour
on a website is not trivial. It involves looking for patterns
where someone might get a quote and then just amend a few things
in an unnatural way. It is not as straightforward as just doing
some simple checks. It is quite a lot of detail where mathematics
would be required to see how—
Q33 Chair: Mr
Anderson, do you think that this area is taken seriously enough?
Duncan Anderson:
I think insurers do take it seriously. I think it is a hard area
to do well. I think there is probably more that can be done in
this area.
Q34 Chair: What
would you say is the extent of fraudulent information given in
this way?
Duncan Anderson:
I think it is very hard to say. I have no real data. Measuring
fraud, and measuring changes in fraud in particular, is very difficult.
By its nature, if it was easy to detect it could be stopped.
Q35 Kwasi Kwarteng:
I am picking up from material in the written statements that the
position is unsustainable. You have rising costs. I think there
was one person who suggested that the insurers are paying out
£1.23 for every £1.00 they are getting in. Clearly,
the state of the market means that their investments aren't giving
the returns that they should be.
I was just wondering, against that backdrop, what
do you think is going to happen in this industry? It seems to
me that if you were looking at market economics, you would assume
that a lot of these players, these insurance providers, would
exit the market and that that would somehow be a correction. I
was just wondering what your thoughts were on that.
Duncan Anderson:
My view is that the increase we have recently seen had a little
bit of catch-up. We've had relatively fast premium rate increases
in 2007 and 2008. I think the recent increases we've seen are
catching up. I think once the insurance market as a whole gets
to a sustainable rate of premiums, if claims continue to increase
at the rate they are currently increasing, the rates will continue
to increase as well.
Bodily injury claims are going up at approximately
30% per year. That is part of the cost. The other claims types
may be more like 5% per annum. So overall, there might be a 15%
to 20% natural increase in claims cost if things continue as they
are, which will be reflected into ever-increasing premiums, which
are increasing in real terms.
Q36 Kwasi Kwarteng:
But that isn't sustainable, is it? This was the whole point of
the paper. We can't live in a world where you have ever-increasing—
Duncan Anderson:
That is what I think will happen with the current free market.
Insurance companies will have to make an acceptable return and
some may exit as a result as they struggle to do that. The question
then is, if rates increase and insurance becomes less and less
affordable at young ages, I think it then becomes a political
question as to whether that is an acceptable state of affairs
for the country. But I think the free market is adjusting and
coping with the various congruent forces and effects that have
happened over the last year or two. I think the real question
is whether the increases for policyholders are acceptable or whether
the Government should consider doing something.
Q37 Chair: Mr
King, do you want to come in there?
Edmund King: Yes.
Our view is that it is unsustainable if it continues increasing
in this fashion. For young drivers, it is an average of £2,500.
They cannot afford that with tuition fees and everything. It has
an effect on society because what then happens is that some people
take a risk to drive uninsured or to start driving mopeds, scooters
or motorcycles and injury rates can go up.
I think it has to be addressed on a number of levels.
There is the Lord Justice Jackson review that looked at civil
litigation and fixing legal fees for personal injury, curbing
cold-call advertising that pushes up the premiums. Lord Young
has recently looked at the compensation culture, restricting the
type of volume of advertising by these companies. I think that
all has to be done and at the same time as efforts are continuing
at making our roads safer. We do have some of the safest roads
in Europe. The recent figures showed that.
However, among young drivers there is still much
more that we can do in terms of training of young drivers and
enforcement and the kind of policies we offer to young drivers:
offering policies that regulate the way they drive; whether they
drive at night and how fast they drive; and using telematics to
show what risks they are taking. Those things can help bring premiums
down. I think if we do nothing, yes, the costs will not increase
as fast as we have seen over the last 12 months because there
has been a catching up—those 50% increases. We will not
see that, but we will see continual increases unless we take decisive
action from Government, from education, from police and from DVLA
links. We need to do all these things.
Q38 Chair: But,
Mr King, there are other areas as well. You mentioned referral
fees. How much does the AA get itself in referral fees for passing
cases on?
Edmund King: I'm
not aware of that level of detail, I am afraid. I don't work on
insurance.
Q39 Chair: But
does AA Insurance receive referral fees?
Edmund King: I
believe that there are some referral fees and that is in a regulated
part of the industry, whereas cold-call marketing is not regulated
at all.
Q40 Chair: But
have you any information on how much AA Insurance receives?
Edmund King: I'm
afraid I don't. It's not a part of the industry I'm involved with.
Q41 Chair: So
we would need to ask somebody from a different part of the AA?
Edmund King: Unfortunately,
the Director of AA Insurance is on holiday, so I am sitting in.
It's not an area of my expertise.
Chair: Perhaps we will talk to him when
he comes back from holiday.
Q42 Kwasi Kwarteng:
I think you helped me. I will try and reformulate my question
in slightly clearer terms. When you say the rate of increase is
unsustainable, does that mean that there will be a natural market
correction to that rate, or are you saying it's unsustainable
in a wider sense and that society shouldn't tolerate it?
Edmund King: I
was talking about it from the consumers' point of view. The kind
of increases that we are seeing are unsustainable. Young drivers
will not be able to afford to drive vehicles at current rates.
Q43 Kwasi Kwarteng:
But presumably, that means that at some point these rates will
come down. The root of my question is: to what extent do you think
the Government should be intervening to cap or prevent these increases?
If you were a market economist, you would assume that at some
point these rates are not going to carry on increasing indefinitely.
That was my understanding when you, or whichever report it was,
used the word "unsustainable". You are suggesting to
me that you feel this thing is just going to carry on going up
for ever—
Edmund King: Unless—
Q44 Kwasi Kwarteng:
Unless we actually have something positive. That is what I want
to get a sense of.
Edmund King: The
rates reflect the risks and the costs to the insurance companies,
so if there are more bodily injury claims, the insurance premiums
will go up. If we allow more claims management companies more
cold calling, they will go up. Unless we address that part of
it, we cannot reduce it.
Unless we address fraud with better links to the
DVLA and more police ANPR enforcement, premiums will keep going
up. There are things that we can do, and of course there is lots
of education for young drivers that we're involved with. There
are BTECs in driving so that people don't just pass their test;
they're safer drivers. There's a lot of work we are doing on that
side. I am saying that unless we do all those things, the pricing
will be unsustainable for consumers. Young drivers will not be
able to afford to drive until they're 25.
Q45 Kwasi Kwarteng:
And the premiums will keep going up?
Edmund King: Yes.
Already the premiums are costing far more than the cars that people
can afford, and that's pricing people out of the market. It does
have an effect on society. For many young people in rural areas,
to get and keep a job they need mobility in areas where there
aren't buses. There have been grants in the past. I think in Gordon
Brown's constituency a few years ago, there was a mobility grant
to help young people buy motorcycles or mopeds to keep them mobile,
to keep their jobs, because people weren't keeping jobs. I do
think there is a broader issue here for society.
Q46 Kwasi Kwarteng:
Is that something that the other members of the panel agree with?
Do they think that there must be some sort of intervention to
curb this?
Q47 Chair: Does
anybody have a different view on it?
Will Thomas: I
think we've seen symptoms of the higher premium rises, as Edmund
says, due to the risk of being evaluated as such. We sometimes
need to look at the causes of that. When we see a group of young
drivers, 17 to 25-year-olds, they are 15% of the driving population.
They have 31% of all accidents and the proportion of the whole
claims cost is 40% for that group. I think there is an education
piece there, as Edmund rightly said.
Q48 Chair: But
do you think anything should be done in the other areas as well—the
areas to do with the aggressive marketing that goes on, to do
with referral fees and escalating legal costs? Do you think there
needs to be any Government intervention or regulation in that
area?
Will Thomas: I
think there are a number of different areas we could focus on.
Q49 Chair: Yes,
but I'm asking you about those areas.
Will Thomas: We
touched on the fraud element earlier. We are striving to make
sure that—
Q50 Chair: The
question is: do you feel there should be any intervention by Government
in those areas in terms of regulation or any other way, or do
we just let it go?
Will Thomas: With
facilitating and engagement with the DVLA.
Q51 Chair: Do
you think that would be an area of helpfulness?
Will Thomas: Definitely.
To get more accurate representation of the individual's risk when
they are inputting their details would help greatly down the chain
and potentially remove that element of fraud out of the industry.
Q52 Chair: Mr
Anderson, do you want to say something?
Duncan Anderson:
I think it's a political question. We're balancing the freedom
of solicitors to have referral fees and insuring the resulting
claims against the effect on young drivers. My personal view is
that the balance is wrong. My personal view is that things like
the Lord Justice Jackson review should be implemented quickly
to ban referral fees, and maybe we should introduce fixed legal
costs for a wider range of claims and set a fixed lower rate of
costs for some of those claims, and that these steps would help
address the prevalence of this claims farming activity. It is
my personal view that the current situation is not in the wider
interests of society, but that is just a personal view.
Q53 Chair: Any
views you give here are evidence to this Committee, so they are
presumably from your knowledge and experience. Dr Brown, is there
anything extra you would like to add to this?
Dr David Brown:
No. I think there is very clearly a connection with the claims
management companies and the referral fees. That is, in a sense,
the engine. If an unacceptable consequence of that is that insurance
becomes unaffordable, then action must be taken at root cause.
Q54 Iain Stewart:
I wanted to ask about the experience in other countries that operate
a system for young drivers after they pass their test. I think
in France they have an "A" plate for a period of time.
Is there any evidence from abroad that that would reduce premiums
for younger drivers?
Edmund King: Yes.
There are a number of things that the Government here have looked
at. In Canada for example, after your first year of passing your
test, there are various restrictions on numbers of passengers,
etcetera.
The evidence actually shows, though, that on many
of these things you can just be deferring the problem from 17
to 18, or 18 to 19. In many of the states in the United States
of America that have graduated licences, people begin to learn
to drive at 16, so the restriction is at 17. You can do those
things, but our view is that fundamentally you have to start before
then. We have actually asked young drivers recently on this and
surveyed them, and part of this is that there ought to be more
about road safety in the school curriculum before you learn to
drive as a life skill.
We did a survey of 18,000 adults and asked them
what was the biggest accidental cause of death of teenagers and
they got it totally wrong. Only 10% got it as road crashes. They
would talk about guns, knives, stabbing, HIV and drugs. But there
is the risk. So there is the awareness. If you can introduce that
awareness at a younger stage in the school curriculum, that will
help.
I then think you do have to look at learning to drive
and the driving test. Much of it is still focused on passing the
test rather than becoming a better driver. That is where we are
promoting a BTEC system. So it is not just learning to drive:
it is learning how to be a safer driver and hazard perception.
There's post-test training as well, so when you pass your test
you're not a good driver; you need to do motorway driving, night-time
driving, etcetera. We are developing that.
The AA Charitable Trust are working with the
police and asking the police to tell us which young drivers are
most at risk. Then we are giving them free Drive Smart courses.
The police don't always want to prosecute when someone's wrapped
a car into a tree, but they know that the next time that driver
goes out they'll kill themselves and kill others. We need to stop
that, so we're offering training there. I think there is more
that can be done on education to reduce the risks and therefore
reduce the costs.
Q55 Gavin Shuker:
I have two questions around the distribution of premiums because
it seems to me there is a major problem at either end of the curve
in a sense. The first one, really simply, is should safer drivers
have to pay more in order that less safe drivers can afford their
premiums? Would anyone like to come in?
Edmund King: No.
What I'm saying about safer drivers, for example, is that if you're
talking about young drivers who do this BTEC qualification, we're
talking to insurance companies—the BTEC probably costs £150
more than doing your driving lessons—and if we can get them
insurance discounts of 15% in the first year, they're just about
getting their money back.
With Pass Plus, there was an incentive for young
drivers to get a discount, but what you tended to find was that
the insurance companies that offered that discount were more expensive
to begin with, so many of the young drivers thought, "Well,
it's not worth doing Pass Plus because it doesn't really affect
us." I think there is more that we can do when drivers show,
and we can prove statistically, that the courses that they're
doing are reducing their risk. There should be lower premiums.
Q56 Gavin Shuker:
Just on that though, you stated previously that young people's
premiums went up by about 50% in the last 12 months. So when you
say 15%, the maths doesn't quite work in terms of an incentive
to drive down the premium cost. Young people's premiums seem to
be a major factor.
Edmund King: I
accept that. It will make a difference but still will not reduce
it to the levels we saw last year.
Will Thomas: Might
I just touch on telematics? With the advances in technology nowadays,
there are two companies that I can mention—GreenRoad and
Coverbox—that will insert technology in your car that will
monitor the way you drive: whether you brake hard or you accelerate
quickly, or whether you turn round corners at higher G-forces.
This is monitored closely by parents, guardians and insurance
companies to understand the way these drivers are driving, and
it also provides an incentive for the drivers to have this technology
installed. It is a deterrent to driving erratically. Over a period
of time, if it is evaluated that they are driving erratically,
their insurance premiums go up, and if they drive better then
they get rewarded for that, for being a safer driver on the road.
Q57 Chair: Dr
Brown, looking at it from an actuarial point of view, do you think
enough is done to distinguish between the risk posed by safer
drivers and more dangerous drivers, following Mr Shuker's point?
Dr David Brown:
I believe so, and from what I know of the rating of different
insurance companies, they try to differentiate the risk as much
as possible.
Q58 Chair: Do
you think more could be done to differentiate the risk?
Dr David Brown:
Certainly the more data that there is, the more distinction can
be carried out. I think certainly telematics does offer one solution.
The question there is about just how you can do that in a way
that is relatively low cost and also how that would work in terms
of the relationship with an insurer and would alter people's ability
to be able to change insurers easily.
Chair: Mr Shuker, do you
have just one more point on that?
Q59 Gavin Shuker:
Yes. In the absence of telematics, of course, you're relying on
modelling around risk factors. One witness previously stated that
bodily injury claims now make up about 50% of the cost, up from
20%. Postcode seems to play a massive role in determining the
cost, which to me certainly would look as though that's relying
maybe on theft as opposed to modelling of the people that are
living there. Is that correct?
Dr David Brown:
It's all modelled at a peril level.
Q60 Gavin Shuker:
So people living in a certain postcode, in your opinion, are much
more likely to display reckless behaviour on the roads?
Dr David Brown:
That's what statistics show, although I'm not suggesting that
behaviour is reckless, simply that it leads to more third-party
insurance claims for bodily injury.
Duncan Anderson:
Let me just clarify. On the issue of assessing risk and trying
to charge premiums with that risk, the nature of the free market
is that those insurers that do that more accurate will do better,
and so there's been a huge amount of work over the last 20 years
in building complicated statistical models that use every piece
of data available about a policyholder to try and assess as accurately
as possible, given the actual claims—
Chair: But nevertheless
there's been this great escalation of costs for everybody.
Q61 Steve Baker:
Mr King, I was hugely encouraged by some of the things you said.
In particular, you talked about driving as a life skill and you
talked about starting early. It points to the value of motoring
and encouraging personal responsibility. I was also encouraged
by some of the things you sketched that the industry is already
doing in this regard. The question is this: should industry or
Government lead in these long-term efforts? Either way, what can
Government be doing at a low cost to catalyse and multiply the
benefits of what you are already doing?
Q62 Chair: We
had some points before about what Government should do, but we
didn't talk about what the industry should do.
Edmund King: From
the insurance industry point of view, you mean?
Q63 Chair: Yes;
insurance or the legal profession, or any part of the industry
involved in this area, Mr King.
Edmund King: In
terms of young drivers and making the premiums more affordable,
it's got to be embracing the changes in training that actually
produce safer drivers. I have to say with this BTEC qualification
we are going to be offering software free to every school in the
UK, so every 16 and 17-year old can have access to it.
I have to say that convincing the insurance companies,
going round to get the second part of the deal to get the discounts,
has been incredibly difficult. Our actuaries will say, "Well,
you haven't got the evidence already because the course is only
just starting." It is chicken and egg to some extent. Now
we have got a couple of insurance companies to help. I think on
that the industry has to think of their customers of the future.
You can't just close your eyes to young drivers and say, "Well,
hey guys, you're a big risk. We're not going to take you on."
Q64 Chair: No,
but the question is, what should they be doing?
Edmund King: What
I'm saying is that the insurance industry should be more open
to the training of drivers to show that it makes safer drivers
to give greater discounts. You've got to do something for the
customers of the future.
Q65 Chair: Are
there any other points that the industry should be doing—any
of the industries or professions associated with driving and insurance?
Will Thomas: I
think working together to create a recognised qualification that
insurers will recognise to give discounts to young drivers is
a positive step. I think looking at the Pass Plus scheme and understanding
where in certain areas that succeeded and failed would be a good
start. Traditionally, when the Pass Plus scheme came in, discounts
of up to 30% were provided by insurers. Some anecdotal evidence
we are getting back is that, on evaluating risk of people with
these qualifications, there seems to be no difference between
people that have it or don't have it. Maybe it's an option for
us to go forward and look at how we can change that to improve
experience.
Q66 Chair: Are
there any other suggestions on what the industry might do?
Duncan Anderson:
I would just concur with the attraction of telematics as a solution,
not only to assess risk but also to train drivers and provide
feedback in real time, as evidence is that machines that beep
if you do wrong things do improve driving behaviour, and that
as device costs are coming down, in a year or two they will be
quite viable for a wider group.
Q67 Steve Baker:
May I just ask the insurers whether it is possible to imagine
coming on to a trajectory where premiums are coming down but actually
your margins are going up because the standard of driving has
improved to that extent? Is it even possible to imagine that?
Edmund King: I
would love to imagine it. The one thing we are doing in this country
is that deaths from driving are going down. It was 2,222 last
year. Yes, that's too many but we are making improvements in terms
of road safety generally. So I would like to imagine that, but
I think these other issues of fraud and personal injury claims
have countered, if you like, the good work that has gone on. Cars
are safer, accidents are down and yet the premiums are up.
Q68 Chair: It
is the issues that we identified at the beginning, isn't it, that
are causing the problems despite the reduction in deaths on the
road?
Edmund King: Yes.
Q69 Julie Hilling:
Can I ask a question generally about gender because we are talking
about young drivers, but actually is there a marked difference
in terms of young women and young men in their accident rates,
etcetera?
Edmund King: Yes.
From our Insurance Premium Index, the average for young males
is 2,500 and for young females it is 1,400; so young males are
over-represented in the accident figures. Females are generally
safer drivers.
Duncan Anderson:
The statistical modelling which every insurer will do will assess
the true effects of things like gender, age and driving experience
and 20 or 30 or 40 other factors. It will assess which of those
factors are actually causal and which have just a superfluous
correlation with other factors.
It is very clear that young males do have a higher
propensity to have accidents than young females. The effect of
gender becomes much less of an issue at higher ages because experience
is more similar as they get older. But at those younger ages there
is absolutely clear evidence. If you look at a graph of male accident
rates by age and a graph of testosterone by age, they are remarkably
similar. It is just fundamentally things to do with how young
males have an attitude to risk that do affect claims experience,
and that's reflected in these figures.
Q70 Chair: Dr
Brown, do you have anything you would add to that from the information
you have?
Dr David Brown:
No, that's exactly the way the analysis is done in the industry.
Q71 Julie Hilling:
Is there adequate targeting then of young men, because if machismo
is the problem is there enough targeting of that, rather than
just talking about "young people"?
Dr David Brown:
In terms of the differentiation of the premiums between males
and females?
Julie Hilling: Yes.
Dr David Brown:
From my experience I believe so, yes. The actual premium charged
reflects the risk. In an intensely competitive market, which is
clearly what we have—so intensely competitive that in fact
it's loss-making—insurers will be trying to find those segments
of business that they can do where they're not going to lose money
and charge cheaper premiums in line with the lower risk in order
to acquire more of that business.
Q72 Julie Hilling:
In terms of those solutions then, are we adequately targeting?
When you're talking about telematics or whatever else it is, is
that adequately targeted on boys?
Q73 Chair: You
are talking in terms of better training, education and things
of that nature?
Edmund King: Yes.
I am sure there is much more that we can do in targeting particularly
young males, starting at an early age. The other issue here is
whether the EU gender discrimination comes in and actually pushes
up the premiums of females who are safer drivers. There is some
talk about that as well.
With young males, whether it is their upbringing
or how they approach thrills and spills on the road, there is
some evidence that this Committee took, I think last year, from
the Under 17 Car Club that did show that if you can get young
males at a younger age and train them off road and develop their
skills—if you like, get rid of some of that adrenalin before
they take to the road—they turn out as safer drivers. Unfortunately
this Under 17 Car Club is relatively middle class, relatively
small in terms of geographical area, so probably the people most
at risk do not have access to things like that.
Chair: We did take evidence
when this Committee's predecessor looked at novice and young drivers.
We did identify this problem. We had some suggestions. Some have
been taken up; some haven't. Some are now being repeated by our
witnesses, so maybe we will make further progress.
Q74 Julian Sturdy:
Could I go back to a point raised by Mr Stewart earlier on about
what other countries are doing regarding young drivers? I take
on board the points that have already been mentioned about education
being key. I think that has been covered in one of the other questions,
which I entirely agree with.
I had some experience in Australia some time ago.
I think they still run what is called a "P" plate system
for maybe one or two years after people pass their test, which
means that they've got restricted road use, restricted speed and
potentially even restricted driving time, I seem to remember as
well.
Do you think that that sort of system—I am
not saying with the same sort of restrictions—where younger
drivers in their first or second year of driving have a restricted
speed, etcetera, coinciding with better education together can
help? So it is not just education and not just restrictions. I
accept the point you made earlier that, if we just restrict, then
it is only delaying the potential for further accidents.
Edmund King: Sure.
There is no doubt that young drivers are more likely to have a
crash in the first six to eight months of driving. That is the
time they are more at risk. We have introduced some restrictions
in this country. For example, if a new driver gets to six penalty
points within the first year, they lose their licence and have
to take it again, rather than that happening at 12 penalty points.
So there are some restrictions there. I think restrictions in
speed are extremely complicated. When we look at it with trucks
with different speeds on the motorways, with flows of traffic,
that can cause other problems.
I think what we have to look at more—and
this is where telematics could help restrict—is when and
where a young driver is most at risk. It is between 11 o'clock
at night and five in the morning when there are three or more
males in the car and when they don't wear seatbelts. We shouldn't
overlook the practical things: 30% of young drivers who are killed
are not wearing a seatbelt and 20% of young drivers are over the
drink-drive limit or drug-drive limit. We've got to enforce those
things. Telematics could offer the solution that if a young driver
goes out after 11 o'clock at night in the car, the cost per mile
is doubled. It is minimising the risk, so I think telematics could
help.
But I do also think parents' pressure is important
as well. If your 18-year-old is getting into a car with four other
kids, do you know who the driver is? Do you know what that driver's
reputation is? The teenagers tend to know. Certainly nephews and
nieces of mine that have done the Under 17 Car Club knew the risks.
They would actually say, "No, I'm not going to the party
in Johnny's car because he's a dangerous driver." I think
parents have a heck of a lot to do, to ask those questions—"Who
are you driving with? Who's driving back?" and even, "What
kind of car is it?"
If you had seen crash tests on the original Mini
Metro that Euro NCAP did and had seen the damage that happened
to that car, with the steering wheel into the chest—I would
not put any kid of mine in one of those cars because of the risk.
I think parents have a lot to do, knowing the risk, because the
number one cause of accidental death for teenagers will be in
car accidents, so it is that crucial.
Q75 Kelvin Hopkins:
All these other factors are important, but there is a quotation
in our papers from Moneysupermarket.com who say, "Insurance
policies fail to incentivise responsible driving." In a sense,
it is laying responsibility on insurers to do better in incentivising
better driving.
We have talked about young males. If young men under
25 were not permitted to drive, it would probably save hundreds
of lives and thousands of pounds on our policies, but obviously
that politically would be rather difficult to introduce. Indeed,
you could even have an age differential. If women could drive
from 16 and men could drive only from 21, in a sense it would
make a point about young men being rather stupid when it comes
to driving behind the wheel of a car.
Are there differences
in driving ages in other countries? I am not sure. If, for example,
our driving age was raised by a year, that would make a significant
difference. Do other countries have different driving ages?
Edmund King: Other
countries do. The evidence I've looked at is that raising the
driving age by a year would have benefits in the first year alone.
The difference between a 17-year-old and an 18-year-old in terms
of mental development is very small. I think the research from
Cranfield university shows that the real difference actually comes
at about 21 in terms of mental development to risk-taking and
things. I think the difference between 17 and 18 would not make
much difference apart from the first year.
Q76 Kelvin Hopkins:
There is another suggestion in our papers that some young drivers
disguise their insurance because it is all part of their parents'
insurance. If they were all required to have individual insurance,
would that make a difference? It would make them much more conscious
of the fact that they, personally, were responsible. Rich parents
no doubt would pay for them, but for most young people they would
have to pay their own insurance and that might be quite steep.
Edmund King: Indeed.
If they are the main driver of the car, they should be paying
the insurance. When they go on their parents' insurance but they
are the main driver, it is known as "fronting" and it
is actually fraudulent, although some parents don't perceive it
that way. In effect, if it is their own car and they are the main
driver, the insurance should be in their name.
Q77 Kelvin Hopkins:
Is there a case, in fact, for getting rid of the named driver
approach altogether and having individual insurance for everyone?
Edmund King: For
every individual?
Q78 Kelvin Hopkins:
For every individual, whoever they are, whatever age? Is there
a case for that with named drivers?
Edmund King: I
think it is difficult. What we are actually finding now with younger
drivers is that some of them are putting off the driving test
until later. That might be because of going away to university,
tuition fees and the cost of learning to drive. If they're at
university and they learn to drive, many of them will not have
their own car, but when they're back in the holidays and they
want to get a night-time job in rural Wiltshire, being on their
parents' policy is absolutely fine and gives them experience of
driving. If they had to have their own policy, they couldn't afford
to do it just for the holidays.
Q79 Chair: Dr
Brown, do you think there should be any change in policies in
relation to named drivers?
Dr David Brown:
I think it is a slightly difficult one because I think under the
Road Traffic Act the vehicle has to be insured, so what, for example,
if somebody steals the vehicle and then runs somebody over and
that person is badly injured? I think that element would certainly
need to be considered. There is another obligation for insurance
cover there which individual insurance would not as such cover.
Q80 Kelvin Hopkins:
I have one other very simple question. It seems to me that vast
sums are spent on advertising motor insurance on television and
elsewhere. What proportion of your costs is in advertising and
could that not be brought down?
Will Thomas: If
I can answer that question, due to the increased usage of comparison
sites the marketing costs for insurers have gone down. We have
seen some drop in and sustained premiums between 2007 and 2009
being partly due to the fact that insurance companies weren't
spending as much on acquiring customers. They were acquiring them
through comparison sites.
Q81 Chair: Mr
Thomas, do you receive a fee or other financial benefit from the
insurers who advertise on your website?
Will Thomas: Yes,
we do. If a sale is placed through a comparison site we get an
introductory fee for that.
Q82 Chair: What
would stop you from giving the business where you get the most
financial advantage rather than the best deals?
Will Thomas: It's
in our own interests to create a visible, transparent market for
consumers, and that's exactly what we provide.
Q83 Chair: But
do the consumers know the fees? It may be differential fees you're
getting from different insurers. Is that made public anywhere?
Will Thomas: It
is not made public, but they are generally consistently around
the £40 mark and they are considerably less than insurers
spend on acquiring customers themselves.
Q84 Chair: No,
that's not the question. The question is, there is clearly a financial
benefit for your website, and presumably others, in giving business
to one insurer rather than another. Is that information made available?
Will Thomas: The
information is not made available. We can make it available but
there is no preferential treatment to any insurer or any provider.
The marketplace that we provide to consumers is accurate and transparent,
and never has it been easier for consumers to understand what
insurance is right for them at the price that is right for them,
which was a real difficulty before.
Q85 Chair: But
there is a different financial benefit on securing business from
different insurers. You can't check all the information that the
potential customers are giving to you, so that's not very transparent
really, is it?
Will Thomas: I
feel it is, and I think it's elements that we've touched upon.
It's difficult to identify fraud, and we will work in all manners
with our insurance partners to make sure that we create a sustainable
insurance model through a channel that allows consumers to significantly
save money and in making sure that they get the right cover at
the right price for them.
Q86 Kwasi Kwarteng:
I was just reflecting on what you were saying about education
in terms of preventing accidents. Clearly in terms of this market
it is not the prevention of accidents. It is not helpful in the
sense that we've got fewer accidents and we've got lower mortality
rates than we've ever had, yet these premiums are going up. It
is not altogether clear to me that if you had even fewer accidents,
we wouldn't have this problem of increased rates. It seems to
me as a corollary of that that there is something funny about
the structure of the market in terms of, as you say, the competitors
and people making claims and fraud. That seems to be where the
problem is.
I am not saying that we are out of the woods in terms
of mortality rates on the roads, but we've actually done quite
well on that in the last 20 years if you look at the figures.
I was just interested at the end to ask: what do you think the
Government can do—because that's what we are, the politicians—about
fraud and the marketplace? Should we regulate the marketplace
more? Should we try and put higher barriers to entry into this
market?
Q87 Chair: I want
one short point from each of you, if you want to give one, on
the most important thing that Government should do to change the
situation.
Kwasi Kwarteng: On that
particular part; not the education part.
Chair: Just one short
point, for anyone who wishes to give one. You don't have to.
Duncan Anderson:
Implement Lord Justice Jackson's review.
Q88 Kwasi Kwarteng:
You think that's crucial?
Duncan Anderson:
Yes.
Q89 Chair: Does
anybody else want to say anything?
Edmund King: And
indeed Lord Young's views on advertising by claims management
companies: restrict that advertising.
Chair: Is there any other
point?
Will Thomas: I
concur. If we can start controlling these escalating costs then
we can start making the risks—
Q90 Kwasi Kwarteng:
But how do we do that? That's the question.
Will Thomas: Lord
Justice Jackson's review would—
Chair: We are not starting
the discussion again, not here anyway.
Dr David Brown:
I agree.
Chair: Thank you very
much for coming and answering our questions.
1 Note by witness: replace 'third parties' with 'own
damage insurance claims' Back
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