Examination of Witnesses (Questions 140-193)
Q140 Chair: Good
morning, gentlemen, and welcome to the Transport Select Committee.
I wish you all a happy new year. Could I ask you all please to
identify yourselves with your name and organisation for our records?
Could I start at the end there?
Mark Boleat: Mark
Boleat, former Director General of the Association of British
Insurers, former claims management regulator, currently a member
of the City of London Police Committee.
David Powell: David
Powell, Underwriting Manager from the Lloyd's Market Association.
Viv Nicholas: Viv
Nicholas, European Secure Vehicle Alliance.
Deputy Chief Constable Ainsworth:
David Ainsworth. I am a Deputy Chief Constable. I am representing
ACPO, where I have the vehicle crime portfolio.
Chief Superintendent Anwyl:
I am Geraint Anwyl, a Chief Superintendent representing ACPO.
I am the head of National Road Policing Intelligence.
Q141 Chair: Thank
you very much. Perhaps I could start first with Mr Powell. In
your submission you say that the motor insurance market has been
lossmaking since the 1970s. Why then are there so many insurance
companies operating?
David Powell: That
is a good question. We are now seeing a price correction which
will allow insurers hopefully to keep trading. The motor insurance
market is going through a period of real difficulty and it is
a long period. Motor insurance is a compulsory product; there
is a lot of income available out there. It is a £10 billion
gross written premium for the entire market and insurers are seeking
to corner market share and make a profit. Nobody is in this business
to make a loss. But some insurers are exiting the market. We have
seen two Lloyd's syndicates in recent years exit the market following
poor experience, and a number of other providers in the company
market.
Q142 Chair: It
is not very convincing, is it? If it is all supposed to be so
lossmaking, why are so many companies anxious to be involved?
David Powell: Not
every single company in the market is lossmaking. The market
average in 2009 was just over 20% loss, but some companies are
better than average and will have better experience; some will
have worse.
Q143 Chair: How
do the insurance companies make their money? What is the source
of their profits?
David Powell: There
are a number of sources of income. The primary source is premium
income, which accounts for the vast proportion of insurers' income.
Connected to that there are credit arrangements for people who
pay by instalments, which introduces a small amount of income.
They can earn income from investments; from investing the cash
they hold to earn a premium. Insurers can earn money from commissions
on bundled products sold with motor insurance, such as breakdown
recovery, legal expenses, that sort of thing. Insurers do earn
some money from referral fees for cases that are passed to claimants'
solicitors or credit hire companies.
Q144 Chair: Mr
Boleat, would you like to add to any of that or disagree, if you
want to, with any of those points?
Mark Boleat: I
sort of agree. When I was at the ABI a long time ago I was assured
that motor insurance was lossmaking. One of the odd features
of the way insurers look at this is that they tend to look at
premiums and claims, and the difference between the two is called
a "loss". It is rather like a football club measuring
its profitability by the prize money as against what it pays the
footballers and forgetting things like crowd income, television
income and merchandising rights. All of the points that David
made are all part of the motor insurance business and insurers
do not stay in a business for 40 years making a loss. Over the
last 40 years the business has been profitable. Over the last
five or six years for a number of reasons, I think, the business
as a whole has become lossmaking and what you are now seeing
is a correction, but over the long term the business has been
profitable or insurers wouldn't be in it.
Q145 Chair: You
say there has been a correction. Do you think that has been a
legitimate correction or are there things that are illegitimate
going on? Are people being exploited in the way the whole system
works?
Mark Boleat: People
are not being exploited. It is difficult to think of a more competitive
market than this one. One of the things that has happened over
the last few years is that insurers, like all businesses, make
money out of inertia. The people who stick with the same company
year after year are the most profitable. Typically, people look
at the premium. If it's roughly the same as last year, it just
goes straight through on the standing order. If it's 20% higher,
they are going to look at it. More and more people, because of
the use of comparison websites, are now looking at premiums and
the very profitable people who haven't moved in the past are moving
now. In my sample of one, i.e. me, my premium has gone down significantly
for the last five years and this year it has jumped. I think that
might be fairly typical. I suspect, if you look over the last
10 years, what's happened to premiums is they haven't gone up
excessively. If you look this year against last year, you are
seeing, in my view, a straight correction.
Q146 Iain Stewart: Could
I pick up your point about referral fees as part of the income
for insurance companies? In your view, is there an industrywide
move to increase revenue from referral fees as part of your overall
income?
David Powell: I
think most insurers now take some referral fee income.
Q147 Iain Stewart: Is
that going up? Is there a collective mindset in the industry that
this is one area where we can increase revenue?
David Powell: I
think that would probably be fair to say, yes.
Q148 Iain Stewart: To
what extent? Can you quantify that?
David Powell: I
can't, I'm afraid. Referral fees are significantly affecting the
cost of motor insurance; I have no doubt about that. Insurers
are part of that system. It is a dysfunctional system. Insurers
are acting in a dysfunctional way on that issue.
Mark Boleat: Chair,
may I disagree with that point because I think it is a very important
point of difference. Referral fees are a symptom and that they
are not a cause. I am a consultant; I can't double my marketing
costs and then expect my client to pay. The market doesn't work
like that. Referral fees are high because there has been enough
money in the system that lawyers have been willing to pay them.
That is partly because of the claims process reforms that were
introduced in the late 1990s. I guarantee that, if referral fees
were made illegal tomorrow, first of all it wouldn't work and,
secondly, premiums would not move by one penny.
Q149 Chair: When
you say "referral fees are a symptom", a symptom of
what—of dysfunction in the insurance market?
Mark Boleat: It
is a very odd notion that marketing is regarded as a dysfunctional
aspect of the market. You all stood for election last year, I
guess some of you did a bit of canvassing; you had manifestos.
Everybody knew there was a general election. We all knew we could
look at your manifesto and we could go on the website, but all
of you felt the need to do a bit of marketing. Why is this business
any different?
Q150 Chair: You
see referral fees simply as marketing. We have had a lot of evidence
suggesting that that is one of the main reasons putting prices
up.
Mark Boleat: I
think you have, with respect, Chair, no evidence on that. You
have evidence that referral fees are high. That does not mean
they put premiums up. It is not a cost-plus business. If this
is a problem for insurers, very simply, they can try to operate
without referral fees. If lawyers don't like paying referral fees,
there is no obligation on them to pay them to get business. They
can get business in other ways. There is overwhelming evidence,
however, that if lawyers do not pay referral fees or do marketing
they get no business. It is no different from you MPs; it is no
different from the Government advertising for people to be careful
about flu. Everybody knows we have flu and there are websites.
Marketing is a part of everything that we do. This is no different.
Q151 Paul Maynard: Clearly
I am probably a very stupid human being, but as a candidate I
did not charge my voters when I knocked on their doors to canvass
them, I did not charge them to deliver a leaflet; i.e. there was
no cost associated with my marketing activity that I passed on
to my voter. Why is it therefore that motor insurance companies,
who are seeing their claims exceed their income, are looking for
alternative revenue streams that they then generate from those
who are drivers who are looking for insurance? Is that happening?
Is that the structure of the market and what is driving that?
What are these different revenue streams and, in your view, is
that a legitimate way for them to go about their business?
Mark Boleat: I
think the motor insurance market is highly competitive and if
those in it do not exploit every revenue stream available to them
and keep costs to the minimum they will go out of business.
Q152 Julie Hilling: A
person has an accident and a claim is made, but along that route
it seems to me there are an awful lot of people who are taking
a share of money, which must put up the cost to the payer in the
end, the payer being the insured and the insurance company. I
am very confused by your comment that referral fees and that whole
process doesn't put up the cost. I am just wondering if you could
explain how that referral fee and that chain of process that happens
doesn't put up the cost.
Mark Boleat: I
guess the water in this bottle (of mineral water on the table)
costs about a penny. The bottle of water costs, I don't know,
80p. All of that money is taken in the chain from getting the
water from wherever it is, putting it in a bottle and marketing
it. The supermarkets are taking, I don't know, 20p a bottle. That
is how the market works. Referral fees are just a marketing cost
and most solicitors regard the most effective means of getting
business is to pay people who have got claims to get them. They
don't have to pay referral fees. Any solicitor can simply wait
for business to come through the door and, arguably, on that sort
of analysis, they would make a lot of profit because they wouldn't
be paying a £600 referral fee. The bad news is they wouldn't
have any business.
Q153 Julie Hilling:
So your argument is that the whole of that sort of food chain
for people, when an accident occurs, is totally legitimate.
Mark Boleat: Yes.
Q154 Julie Hilling:
And it doesn't actually affect the customer or the market?
Mark Boleat: It
is absolutely legitimate.
Chair: Isn't the point
that all of this leads to increased premiums? Premiums have absolutely
leapt. There has been, generally speaking, about a 30% increase
over the last year. They have leapt particularly for young male
drivers—up 46%—and for female drivers—up 58%.
We are looking now at the way the actual market is operating.
Q155 Kelvin Hopkins: We
are looking at administrative costs essentially and not at the
costs which are incurred by paying out insurance claims. Some
concerns have been suggested in our papers that the market is
actually inefficient and that more regulation might be helpful—if
enforcement of drivers having insurance was much more effective.
One suggestion I have made, and I will make again here, is
that the driving age ought to be raised from 17 to 18, to the
age of majority. That would save a lot of problems. It seems to
me that there is a lot of emphasis on how much is spent on advertising
and whatever, but we don't focus on the costs of paying out claims,
which could be reduced by more enforcement and legislation.
Mark Boleat: I
also sit on the Government's Regulatory Policy Committee at the
moment so I am very much into Government's policy on regulation,
which I think generally is against any new form of regulation
or you need to make the case. The question of the age at which
one can drive is a political matter. If you put it up from 17
to 18, a lot of the accidents that people have when they are 17
they would have when they are 18. You might get a bit of a reduction—
Q156 Kelvin Hopkins: But
there would be one year less of people driving.
Mark Boleat: Yes,
but there is a cost to that of denying people the opportunity,
but that, I think, is not for this panel. That is a political
matter. But you are absolutely right: if fewer people are allowed
to drive, there will be fewer claims, but I don't think that would
affect insurance premiums.
Q157 Chair: Do
the other members of the panel have any views on regulation in
this particular area? What about the way that credit hire firms
operate? Is that seen as dysfunctional? Mr Powell, do you have
any comments on that?
David Powell: Yes,
it is dysfunctional the way the credit hire market currently operates.
This is a circumstance where two people have an accident; one
person is at fault and the other is not. The person who is not
at fault will be contacted by various means, offered a replacement
vehicle, typically for longer than they might need it, at a greater
cost than it would cost an insurer to provide that vehicle, and
the overall impact on claims costs is significant. The figures
that I have from my members are that it can add £600
or £700 to a case where a credit hire company is involved.
Q158 Gavin Shuker: I
do want to turn to the other witnesses, but just more broadly
on the market, we have sketched a picture of a market which is
in places dysfunctional and where there is a major market correction
going on presently, to summarise your collective argument about
what is happening with premiums. Do you believe that premiums
will level off or do you believe they will continue to rise significantly,
say, beyond inflation, over the next five, 10 or 15 years?
David Powell: On
that I would say I don't think we will see a correction over the
next 12 months like we have seen over the last 12 months, but
I would expect premiums to keep increasing because the claims
costs are increasing and the claims frequency is increasing.
Q159 Gavin Shuker: If
we were to divorce what has happened in the industry over the
last 10 years, say, from this moment where there is a major correction
going on, you believe that the cost of claims is going to be the
biggest factor in increasing the premium to the end consumer.
David Powell: Claims
including credit hire costs and similar, yes, I do.
Q160 Chair: Fraud
is another area of concern. We have had a number of concerns expressed
that the insurance industry isn't taking this sufficiently seriously.
I wonder if any members of the panel would like to comment on
that. I know ACPO have made statements on this.
Deputy Chief Constable Ainsworth:
Indeed. In the written statements that I made, the facts, analysis
and estimates concur with our view of what was being reported
on the ground. I collate the information nationally in relation
to vehicle crime, which includes the fraudulent activity, but
my colleague collates it in relation to the roads policing activity,
in other words uniformed presence on the roads.
The trends that are reported concur with what we
are finding on the ground: increased driving without insurance
or at least without valid insurance, particularly amongst younger
members of the public who are higher risk people often driving
under insurance validated by their parents, often called "fronting".
We have seen certainly increased personal injury claims and that
has aligned to reduce attendance to road traffic collisions on
the police service and, yes, we have seen a small increase in
fraudulent activity, often quite well organised fraudulent activity.
You do get some bits at the lower end of the range where it is
an exaggeration perhaps—somebody claiming an injury that
has not occurred. But at the other end of the scale we see organised
activity that can be patterned across the country by certain groups.
The response to the fraudulent activity is patchy
across the country, I'll be honest. The fact is that the police
service has seen a steady decline in the amount of resources committed
to vehicle crime squads and also to roads policing, and my colleague
will talk about that. We have capacity issues in dealing with
this increased fraudulent activity, but we also have capability
issues because some of the expertise that is required to investigate
these matters is quite specialist in nature. The points that we
were advocating were that perhaps we could work more collaboratively
with the insurance sector and put some specialist units together,
for which there are precedents already, one within the City of
London which one of my colleagues will talk about dealing with
the fraudulent activity in the financial sector, and I have
an arrangement nationally with the Finance & Leasing Association
to deal with fraudulent activity in relation to the purchase of
cars. When you have that single source of expertise there is merit
in working collaboratively. So we have capacity and capability
issues in dealing with it and we are looking to work more closely
with the insurance sector.
Q161 Chair: You
say that the response you get is patchy across the country. What
is the nature of that difference and why do you think the insurance
industry is reluctant, apparently, to be more involved in detecting
fraud?
Deputy Chief Constable Ainsworth:
There are a number of reasons why it is difficult for a local
officer to engage. Quite often it will go across several force
boundaries and so it requires a co-ordinated effort. So in this
respect, when you get a pattern that transcends one force area
and, in fact, three, four or five co-ordinating that, it is a
lot more difficult on a local basis. A national or a regional
capability would be better in our view. Also, as I say, these
are complex matters with a number of players and actors involved,
and to uncover that requires quite significant investment and
resources at a time when of course the police service is looking
to make significant cuts and sustain its front-line services.
These are the realities that police chief constables are facing
up and down the country.
Q162 Chair: Chief
Superintendent Anwyl, is there any more you want to add to that
on tackling fraud and how it can be done more effectively?
Chief Superintendent Anwyl:
I would certainly support the fact that the police are not fully
sighted on the amount of fraud because many of these incidents
are not reported to the police in the first place. However, the
competing demands placed on road policing units now are such that
we have fewer than 6,000 road policing officers in England and
Wales who are full-time specialist road policing officers. Many
of them are now adopting other roles, supporting uniformed colleagues
and general police duties. Therefore, the priorities are always
competing against this type of crime. It is, by the reports that
we have, regional in nature and it requires a regional approach—a
national approach—because it is organised, it is linked
very strongly to organised crime and it is beyond the capability
of single forces to deal with it in isolation who have different
numbers of road policing specialists available.
Q163 Chair: Would
you say most fraud is linked to organised crime?
Chief Superintendent Anwyl:
The major frauds that are occurring, yes, are linked to organised
crime.
Q164 Julian Sturdy: Just
on that point, isn't the number recognition technology that has
come forward making it easier to detect fraud and potentially
cheaper in the longer run?
Chief Superintendent Anwyl:
Certainly the use of automatic number plate recognition has been
a great advantage and as a result of that the police service are
seizing over 500 uninsured vehicles a day off the roads. But,
when it comes to the staged collisions or the induced collisions
that are occurring, then it becomes very difficult because behind
that technology you need the human resource to co-ordinate, to
gather the intelligence and then to implement operations to tackle
it. That does not exist on a regional basis, which is what is
required to deal with this issue.
Q165 Julian Sturdy: You
are actually seizing more and more vehicles now through the new
technology?
Chief Superintendent Anwyl:
Yes, we are. Obviously we have to overcome countermeasures to
automatic number plate recognition, which is for ever evolving,
but we are seizing as a police service 500 vehicles a day without
insurance. We are interrogating ANPR, when it comes to those frauds
and those induced and staged collisions that we know about, in
order to collect intelligence information about vehicles that
were present at the time. But there is an awful lot more that
can be done.
Q166 Chair: Can
you give us an example of an organised fraud?
Chief Superintendent Anwyl:
Yes. I can give you an example without going into specific details
where they set up their own claims management company. They have
a doctor who could be a member of the family. On the legal side,
a solicitor could be a member of the family. The victim of the
collision is also part of that organised crime group, as well
as the offender being part of the organised crime group. The entire
incident is contained within a group who are well known, and often
related, to each other. Fraud can happen in that a collision is
induced—caused to occur—which is a very high risk.
When it started off in the United States fatalities occurred and,
clearly, we have been very lucky in this country thus far, but
the magnitude of some of these collisions is such that it is only
a matter of time before we see some very serious injuries to those
involved. They will be induced collisions. Others are staged collisions,
and then there are collisions that are fictional. There is an
audit trail of the collision having occurred and there is a vehicle.
All the main players are there but, actually, a collision never
did occur. It is quite varied in its nature, but it's very highly
organised and clearly very profitable, but it is a high-risk activity.
Q167 Chair: Are
there any particular parts of the country where this is prevalent?
Chief Superintendent Anwyl:
This is the regional nature of this. In the spine, right up to
the centre of England and including the north-west of England,
we see this occurring, and it moves. If it was based in certain
locations and remained in those geographic locations, it would
be easier to tackle, but it is by its very nature transient and
the groups are moving along the spine of England largely. That
is where it's happening and that's why it requires a regional
approach to tackle it effectively.
Q168 Julie Hilling: Just
on that, would a group operate, though, within a relatively small
geographical area or would that same group be operating on a wider
basis?
Chief Superintendent Anwyl:
You can have both types occurring. You will have groups that will
be moving across the country—organised groups talking to
each other and going into each other's areas. You will also have
some that will be locally based. When you have claims management
companies established, the medical support, the doctors and the
solicitors will be localised. However, the collisions themselves
can occur anywhere along that spine. Some of them are local and
it is much easier to address those issues, but these groups are
very well organised and because the return is so lucrative it
is worth them travelling in order to make detection so much harder.
They are aware of the technology and they are aware of the policing
operations and how we go about business.
Q169 Steve Baker: Mr
Boleat, earlier you said that it's not a cost-plus business. Just
thinking about the conversation we have had, what I have
understood is that there has been a lot of pressure on the industry,
which suggests that the just price for an insurance contract is
the sum of the input costs. Could you just explore that? How,
in general, is an insurance premium formulated? Is it just the
sum of the input costs, including things like referral fees, or
is there something much more subjective about that? You gave the
example with the water. Beyond that, just one very short addition
to it, what is the single largest constraining factor on the price
that can be charged for an insurance contract?
Mark Boleat: The
way that insurers fix premiums, and David can add to this no doubt,
is that they have to assess what the claims are likely to be and
what the costs of taking on an insured are likely to be. They
will then want to charge a premium sufficient to cover that and
to make a profit, and the constraint on them is that somebody
else is charging less. So they have to make a judgment as to whether
they want to be in the market. At any one point of time some insurers
will want to buy market share, which is a perfectly legitimate
tactic. They will say, "We need to get a critical mass so
that we can reduce our average administrative costs. Therefore
we are prepared to buy market share." The constraint is what
other people are charging.
Once an insurer is in the market, it can't just come
out. If they say, "We are just not going to bother",
they are left with a lot of business and all the admin costs.
So you can't go in for one year and then come out. Once you are
in, I won't say you are in for life, but when you decide to come
out it's a long and expensive process to come out of the market
and you can't then go back in the next year. You can adjust it
a bit and insurers will take a view, "We are not going to
buy business this year; we are prepared to accept lower premium
income." But on all of those things they have just got to
make a judgment themselves. An insurer will also have to judge,
"How much motor insurance do we want?", as opposed to
other forms of insurance.
Q170 Steve Baker: Mr
Powell, did you want to say something?
David Powell: I
agree with all of that. Setting a price for an insurance product
is quite a complicated process, but it basically involves a number
of risk factors which are assessed about the person buying insurance:
how old they are, where they live, their gender, the vehicle they
are driving, the cover they want and so on—all those basic
characteristics of the risk. Then, in addition to that, you have
to set a price for your costs: the amount of claims that you are
having to pay, the costs related to your capital, marketing and
other related costs. Quite a lot of factors go into setting a
price.
Mark Boleat: But
I would add in income of course. The other income you could get
from selling that policy is part of the equation.
Q171 Steve Baker: Would
you agree that there is a substantial amount of subjective entrepreneurial
judgment involved in setting those prices?
Mark Boleat: I
would say less so in motor than in most other businesses because
it's so big. If you are dealing with earthquake insurance or with
a really big million pound premium to a business, you don't have
the evidence. In motor insurance, there is evidence on age, sex
and location.
David Powell: Indeed.
It is heavily driven by known statistical factors. It is a mass
market. Over 20 million policies are sold every year[1].
Q172 Kwasi Kwarteng: In
all these submissions I am still very unclear as to what the panel
thinks is driving these costs, because clearly that is something
we all accept: we all know that the costs of premiums have gone
up very sharply very recently. You were talking about a 40-year
horizon, but we have seen in the last four or five years a very
sharp increase in premiums. There is a debate obviously about
referral fees and the panel have slightly different opinions.
But, if it is not referral fees, what is driving up the cost of
premiums?
David Powell: In
the LMA submission we identified quite a number of factors which
are driving up the cost.
Q173 Kwasi Kwarteng: Sure.
What is the single cost?
David Powell: The
single biggest factor?
Q174 Kwasi Kwarteng: Yes.
What do you think?
David Powell: Claims
costs make up the biggest proportion of spend, of premium, and
they have increased by 50% in five years.
Q175 Kwasi Kwarteng: Why
do you think that is the case?
David Powell: I
think it's because we have a system that encourages middlemen
to become involved in incidents and encourage claims. By "middlemen",
I mean claimants' solicitors, credit hire firms, accident management
companies and their agents, all of whom can make a profit out
of finding somebody who wants to make a claim and encouraging
them to do that.
Q176 Kwasi Kwarteng: Would
you say that fraud is more or less than it was five years ago?
David Powell: Fraud
has hugely increased. Certainly the amount of detected fraud has
increased. But the spend on investigating fraud is not such a
big a piece of the pie as routine claims costs.
Deputy Chief Constable Ainsworth:
Certainly at the front end, that is our experience. People are
almost encouraged to claim compensation and almost asked to say,
"Are you sure there are no injuries from that?" There
are increased litigation costs and certainly increased claims
for accidents, and often those that we have not attended and are
reported to us late. In law, of course, you should report if there
has been an injury accident but, of course, whiplash injuries
can occur some time afterwards or at least be felt some time afterwards.
We certainly find that at the front end of the business there
are more people being encouraged to explore the options after
a road traffic collision.
Q177 Chair: Mr
Nicholas, would you like to comment on this?
Viv Nicholas: Yes.
Historically, there are always peaks and troughs within many industries.
This industry is particularly cyclical in the sense that they
go too low and then they go too high and there are always periods
of adjustment. In this particular peak—and you have heard
evidence in previous sessions as well—there are particular
instances that all seem to be going the wrong way in the sense
that they are all going to increase the costs.
There is a fundamental about why you insure. Originally
you insured because you wanted protection and support if you had
a problem. It now seems that there are many, many more people
who are out there to beat and abuse the system. One of the things
that has happened over the last five years or so is that that
whole ethos about insurance is to make sure you take more out
than you put in and that is a relatively new phenomenon, given
the plethora of the sorts of temptations and opportunities that
are put out there for motorists to abuse and beat a system rather
than accept the fact that you want to be within one.
This whole area of compliance, I think, is very important.
As a society we need to encourage people to see that there is
value in being compliant and actually joining the club. But many
people now want to get out of the club and beat the club rather
than remain a member of it. That is something that has happened,
and particularly your own evidence can show that happening, over
the last five years or so.
Mark Boleat: In
the report I did for the Ministry of Justice last year I had a
little chapter entitled "Access to Justice or Compensation
Culture", because the two are the same thing. There seems
to be a suggestion on the part of some people that it's terrible
that people are claiming because they've had an accident. There
is no doubt that the proportion of people who have claimed in
relation to the number who are entitled to claim has increased.
More people have access to justice, but anything that makes access
to justice easier also makes fraudulent claims easier. That goes
together. What you have had over the last 10 years, as a result
predominantly of the changes in the claims process system, is
that more people who are entitled to claim are claiming, and that
pushes up costs absolutely and that's proper, but, equally, you
have had more fraud because fraud is easier to commit.
Q178 Gavin Shuker: Do
you believe that there is space in the market for a more basic
insurance product?
David Powell: I
am sure there is space for a lower cost product. There are lower
cost products available but people don't tend to buy them. You
could buy basic compulsory cover and nothing else, but the actual
difference in price between that and full comprehensive insurance
is pretty marginal and people don't tend to buy the cheaper one.
Viv Nicholas: It
is a very eclectic and very competitive market; so, if there is
an angle or a benefit, in time it will come about. A point I would
like to make is that we should look at what happens overseas as
well: what are the learnings and the good practice and better
practice that there is overseas? Again, you have had evidence,
particularly on whiplash, for example, of cultures and environments
where that is managed better than it is here. Also, certainly
I would also say, in relation to this management of fraud and
the joint partnership working between enforcement agencies and
the insurance industry, that there are many instances where that
seems to work much more effectively than it does within the United
Kingdom.
Q179 Gavin Shuker: Just,
finally, Chair, do any of the witnesses take a view on the Jackson
proposals?
David Powell: We
are fully supportive of the reforms that have been suggested by
Lord Jackson and also Lord Young on a similar theme. The recommendations
are seeking to reduce civil costs: that is the cost of bringing
a claim. Lord Young's report includes recommendations to reduce
some of the high pressure marketing and so on which we are seeing,
which we think is a good thing.
To pick up on Mr Boleat's point, I would like to
make the point that people bringing legitimate claims is absolutely
no problem, of course, and the insurance market is there to respond
to those claims. The difficulty—and this is the great issue
that needs to be tackled going forward—is to clamp down
on fraudulent and unmeritorious claims, without affecting people
bringing legitimate claims. That is the great difficulty that
we are wrestling with.
Q180 Iain Stewart: It
is on that point I wanted just to explore a little more the role
of the middlemen, the claim management companies and others. Looking
at the proportion of fraud—not fraud in the sense that they
have manufactured an incident but in the way that they egg that
on by enhancing the injury and damage—first, what evidence
do you have that that goes on? Secondly, what measures does the
industry take to explore if someone makes a claim for whiplash
or some other injury? Do you assess that that is genuine and to
what extent do you just say, "Okay, that's a claim. We'll
pay it"?
David Powell: It
is a very difficult matter for insurers to get to grips with.
The hurdle that a claimant has to get over under the civil law
is pretty low. The evidence threshold is very low. A basic medical
report confirming that somebody reports pain following an accident
is sufficient for a case to be paid. An insurer will need very
good objective evidence that the accident didn't take place or
that the person is not a credible witness, for reasons they can
demonstrate. There would need to be very specific evidence for
an insurer to be able to repudiate the claim where fraud is suspected.
It is very difficult to do, very expensive and resource-intensive.
Q181 Iain Stewart: Do
you think the middlemen are taking advantage of that?
David Powell: Some.
It's not fair to say that middlemen are universally manufacturing
fraudulent claims. That would be completely wrong. But, some are.
Q182 Iain Stewart: Can
you give a rough estimate as to the proportion between the absolutely
legitimate claims and those which are enhanced, for want of a
better word?
David Powell: I
don't have data on that on which I could rely.
Q183 Chair: Mr
Boleat suggested a dedicated group to tackle insurance fraud within
the police but supported and financed by the insurance industry.
Is that a practical proposition?
Deputy Chief Constable Ainsworth:
It is. As colleagues have said, there are precedents for this
already. Here, within the UK, in relation to fraudulent activity
in the purchase of vehicles, it is something that my unit do,
funded by the Finance & Leasing Association. Mr Boleat is
aware of financial support for fraudulent investigations in the
City of London Police. So there are precedents here. There are
also precedents, as Mr Nicholas has said, overseas, where
a dollar per premium in the United States is paid towards enforcement
activity.
In answer to your question about the degree of insurance
fraud, the Insurance Fraud Bureau investigate this and try to
pattern the activity. Quite often it is clear that an operation
will be going on within a specific locality. A number of claimants
within one street perhaps from an extended family will be claiming
at the same time. That sort of patterning of claims will illustrate
that somebody is involved in something that's not quite right,
and that needs investigating. Whilst the Insurance Fraud Bureau
exists, it doesn't have an executive arm to go and investigate
those anomalies and that is what we would initially tackle in
the first instance. I think we would find that, for every pound
invested, the return on that investment would be significant.
So there is a growing momentum to examine this and we would like
this Committee to support and encourage that.
Q184 Chair: Are
there any active discussions taking place?
Deputy Chief Constable Ainsworth:
The honest truth is that it is at the very early stages, looking
to the way in which the insurance sector has worked with us in
relation to the Finance & Leasing Association and the fraudulent
activity there. We are using those models, but we are at the very
early stages of examining that and this Committee's timing therefore
is key for us.
Q185 Chair: Mr
Nicholas, you have some international experience, haven't you?
Viv Nicholas: Certainly
there are organisations that do a very fine job in the area of
bridging this area between the insurance industry and the police.
The other point I wanted to make, really, was a more general one
about the propensity to be noncompliant and about the offender.
It's not just in one area; it's in all areas. If you find a criminal
or someone who wants to beat a system, they are looking at it
in every area. So that supports, I think, a much more capable
and all-embracing way of building bridges between the insurance
industry and other members of the enforcement community.
Q186 Kelvin Hopkins: Mr
Nicholas touched on overseas systems in other countries. I understand
that in some countries they don't like insuring cars because the
repairs are horrendously expensive and people are very casual
about damaging their cars if they know they can get the costs
back on the insurance. I understand southern Europe resist it.
Some think it is laughable that we insure our own cars against
an accident that we might have. Obviously, insuring people against
accidents is one thing, but insuring the car on your own part,
so third party only, is one thought that might make things cheaper.
It might also make people more careful about driving because they
know they won't get anything back if they damage their own car.
That is one big question. The other question is that I understand
that some places such as New Zealand some years ago—I don't
know if it is still the case—had state motor insurance.
The state system was automatic on licensing car ownership and
overcame many of these problems. Are those two possibilities that
you might consider?
Viv Nicholas: I
suspect that there are many people prepared to comment on that.
My own personal view would be that for the state to be out of
anything in life is a good thing, so I certainly wouldn't want
to support any involvement or commitment.
Q187 Chair: We
are having to stick to motor insurance today.
Viv Nicholas: I
wouldn't want state insurance. I don't think that would be very
effective. I think third party in this country is often now more
expensive than fully comp, which is a bit bizarre. But, in time,
if we are informed and particularly for young people making a
transition into becoming insured, these are really critical issues
where we need to find pathways, products and outlooks that are
going to mean that we recover from the system we are in at the
moment, which is frankly a mess. "Dysfunctional" is
a very interesting word and it is one which the insurance industry
themselves have put up. For an industry to say that it is dysfunctional
is cause for concern for us all. Within the insurance industry
as well, I am sure a spectrum of insurance companies have different
strategies as to how they are going to address this. We should
encourage the ones that are doing the right things and hopefully
they will make some more money out of it as well.
David Powell: I
just wanted to come back on that specific question about third
party cover and whether or not that might be a viable option.
I think I touched on this earlier. The reality is that such a
large proportion of the premium is based around paying for third
party claims and the high cost and frequency of those claims that
there is not much difference in price between a third party only
product and a fully comprehensive product. That option is already
there in the market. There are plenty of insurers who will offer
that cover, but the price is actually not very different from
the fully comprehensive price.
There is another minor point about why third party
insurance premiums seem to be higher than comprehensive premiums
in some cases. That's not quite the case. The situation is that
the average third party premium is higher because the people seeking
those premiums are looking to minimise their costs and, in fact,
they are high risk drivers and they have a higher average premium
than the average comprehensive driver.
Q188 Julie Hilling: It
seems to me the industry has a captive audience and they are saying,
"There are all sorts of things that are wrong in it at the
moment but all we'll do is put the premiums up." My question
is: what is the industry doing about the fraud aspect and not
just about saying, "We should have a police unit"? What
are you doing about the sharing of information, etcetera?
David Powell: Can
I make a differentiation between two types of fraud? There is
organised fraud or organised crime on the one hand, which we have
heard about, on which the insurance industry response is very
good, and, in fact, organised fraudsters now have a very good
chance of being detected, caught, prosecuted, having their assets
seized and going to prison. There is a very real and large scale
reaction from the insurance market in cooperation with the
police and Government agencies on that score.
The other type of fraud that is worth talking about
is opportunistic fraud. This is the cases of people inflating
claims where an accident did happen but perhaps exaggerating the
nature of their injury and so on. That is a much more difficult
area to get to grips with. Insurers are spending big to try and
tackle this. They have set up the Insurance Fraud Bureau. The
industry is setting up a new database to help improve data sharing.
One of my members told me recently that they investigated 50%
more cases in 2009 than they did in 2008. So there is a significant
operational spend taking place to try and get to grips with this
issue and it is a very challenging one.
What we need is more data sharing between Government
agencies and the industry and more active enforcement. It is incredibly
difficult to get police and the CPS interested in prosecuting
a low level fraud. At this point the insurer might have successfully
repudiated a claim but would like to see that person prosecuted
criminally, for the criminal act of seeking to defraud an insurance
company, but it is incredibly difficult to find a police force
that would be willing to put that through.
Q189 Chair: What
are the problems the police identify?
David Powell: As
I understand it, it is to do with cost and resource. The police
obviously prioritise high level fraud and higher orders of crime.
If it is a fairly small claim, maybe £5,000 or £3,000,
something of that order, which is very common, it is very difficult
to attract attention. The cases require a lot of preparation before
they can be presented to the CPS. There is lots of to-ing and
fro-ing between the insurer and the CPS to make sure that they
have got the case they need to make an assessment of whether it
is in the public interest to prosecute. It just almost never happens.
Q190 Chair: Deputy
Chief Constable, would you agree with that?
Deputy Chief Constable Ainsworth:
I would agree with those comments about it. You have to take a
pragmatic decision about what a prosecution might secure in terms
of an outcome that is different to what has already been secured
and whether it is in the public interest given the weight of other
matters that require the CPS's attention and court time. There
is additional evidence required to prove beyond a reasonable doubt
as opposed to repudiating a claim. It is a pragmatic decision
quite often of how much investment for how much return on behalf
of the public. So, yes, I agree with those remarks.
Q191 Paul Maynard: There
seems to be a general consensus that premiums have risen sharply
and that has an adverse impact on the consumer—the person
taking out insurance. What I have not quite detected yet
is whether there is a consensus that this is a problem which the
industry itself can solve or whether Government is required to
take action over and above existing reforms in the Jackson review.
I have not yet detected from any of you what you think the
next step needs to be. Is this something you can solve amongst
yourselves or do you need Government to do more still?
Mark Boleat: I
think, Chair, it is an area Government should on the whole stay
out of. It is very difficult to see why the Government should
be seeking to intervene in the motor insurance market, which is
a highly competitive market. The increase in the volume of claims,
though, is partly caused by Government action in respect of the
claims process.
The Jackson reforms are currently being considered.
I don't go along with what Lord Justice Jackson has said on referral
fees. I just think he is absolutely wrong. His assumption was
that people know that you can claim; you can just go on the internet,
find a solicitor and do it that way. The market does not work
like that. No market works like that. I am sure you will hear
from other witnesses later this morning that, if we are reliant
on that, people who are entitled to claim wouldn't be. So I don't
agree with him on that.
I do think more needs to be done in respect of fraud
and I agree with what has been said already. A fair bit is being
done. The insurers are doing a lot and the police are doing what
they can. There is a need for a bit more to be done and I think
there are useful discussions going on in that respect, but other
than that I think it is a market issue. The consumer will best
be served by a highly competitive marketplace.
Q192 Chair: Does
anyone have any different answer to that or any different points?
Viv Nicholas: There
isn't, frankly, enough work being done to discourage fraudulent
activity. In terms of what the Government can do, the Government
could start thinking about aspects of its purview of encouraging
people to be compliant and not to become noncompliant, which
obviously means there are areas of safety, for example, where
one can try and reduce the frequency of claims. There are issues
around young drivers, which clearly are a real concern, to make
sure that young drivers do join our club rather than think it's
just impossible for them to do it. In terms of how we train young
drivers, I think that's very important. The quality of the records
which we have as a Government is not good enough, down at DVLA,
both on vehicles and drivers. If we want to make an investigation,
we should be able to do it more effectively. Those are many things
which the Government can do in areas where it has control.
Clearly this is a very complicated market and for
the Government to think that it can begin to paddle in this very
difficult market is probably unrealistic. But in terms of just
illustrating that there are concerns, which I know the Committee
has done, it is to be congratulated. There is undoubtedly better
working between the police and the insurance industry and other
enforcement agencies, which has come on apace. Clearly it needs
to happen because we are not in a happy place at the moment.
Q193 Chair: Are
there any other short points? Can you be as brief as you can,
please?
David Powell: Sure.
In terms of Government actions, I would suggest that the reforms
which are on the table should be pushed through. I am talking
about the Jackson report, which as a package of measures, which
includes clamping down on referral fees, we would support. I think
it is in the public interest. Similarly with Lord Young's proposals,
with continuous insurance enforcement, which is about to kick
off, we support all of those reforms, which we hope will help.
The one area which we have not touched on and there
perhaps isn't time to go into, is about the risks presented by
inexperienced drivers and whether there ought to be new restrictions
introduced in that area to try and reduce the risks. The final
point I would make is that to get the price of insurance down
you have to reduce the risks, you have to reduce the costs and
the premiums will follow. Those are the issues we have to get
to grips with.
Chair: Thank you very
much, gentlemen.
1 Note by witness: This figure should be 30 million. Back
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