The cost of motor insurance - Transport Committee Contents

1  Introduction

The cost of motor insurance

1. Many motorists have had an unpleasant surprise in recent months in discovering that the cost of their motor insurance has increased significantly. The AA's British Insurance Premium index reported that average quoted premiums for comprehensive cover increased by 11.7% in the third quarter of 2010 and by 29.9% in the year to October 2010.[1] The average of the lowest three quotes from 90 providers (known as the "Shoparound" average) increased by 39.3% in the year to October 2010, to £792.[2] The insurance price index has reported similarly hefty increases in premiums quoted to motorists over the last 18 months.[3]

2. Although most witnesses accepted that motor insurance premiums were rising quickly, the Credit Hire Organisation denied this, pointing out that the published indices of quoted premiums did not necessarily reflect the premiums paid by drivers:[4]

There is a difference with what the AA Index suggests is the cost of insurance and what motorists end up paying as a result of shopping around/changing insurer/no-claim discounts.

Duncan Anderson of EMB (now Towers Watson) consultants explained the difficulty in identifying trends in actual, rather than quoted, premiums, and provided further evidence to support the widely accepted notion that premiums are increasing.[5]

3. We were told that premiums would continue to increase because insurers needed to make up for several recent lean years; that insurers currently spent around £1.20 for every £1 collected in premiums; and that the underwriters of motor insurance had been loss-making since 1994.[6] Other witnesses pointed out that insurers were not entirely dependent on premiums for income, earning money from investing premiums, for example, as well as from referral fees.[7] Some witnesses suggested that premiums moved in cycles,[8] although the AA's Premium Index provides little support for this theory for the period from 1994.[9] Bearing out the predictions of the Association of British Insurers (ABI) and others, premiums have continued to rise into 2011.[10]

4. Young motorists must pay particularly large insurance premiums. The AA's Shoparound average for men aged 17 to 22 increased by 46.6% in the year to October 2010, to a staggering £2,457. The Shoparound average for women of the same age increased by 58.8% during the same period, to £1,423.[11]

5. Insurance premiums are calculated on the basis of risk factors and it has long been recognised that younger drivers, particularly young men, are more likely to be involved in motor accidents than other groups. Duncan Anderson said "if you look at a graph of male accident rates by age and a graph of testosterone by age, they are remarkably similar".[12] told us that people under 25 accounted for 31% of motor accidents and 40% of claims costs.[13] The AA said that "under age-21 male drivers are 10 times more likely to have an accident than those aged 35 or over [and the] average claim value for under-21s is three times greater than for those aged 30 or above".[14] The Government told us that "as many as a fifth of newly-qualified drivers make a claim within six months of passing their test".[15]

6. Nevertheless, the number of casualties in road accidents is decreasing. There were 163,554 road accidents involving personal injury in 2009, the most recent year for which figures are available, 31 per cent fewer than the average figure for the years from 1994 to 1998. Of these, 24,054 accidents involved death or serious injury, a reduction of 41% over the same period.[16] This is part of a longer term trend: the number of casualties per 100 million vehicle kilometres has fallen by 75% since 1967.[17]

7. We launched our inquiry in October 2010 in order to investigate how insurance premiums could be increasing so quickly even though the long-term trend towards safer roads is continuing. We chose to focus on:

  • the reasons and consequences of recent increases in the cost of motor insurance;
  • the impact on young people of the high costs of motor insurance;
  • the extent to which the cost of motor insurance is influenced by the prevalence of road accidents, insurance fraud, legal costs and the number of uninsured drivers; and
  • whether there are public policy implications of the rise in the cost of motor insurance and, if so, what steps the Government might take in response to them.

We took oral evidence on 9 November 2010 and 11 January 2011 and are grateful for all those who contributed evidence, both written and oral.

Cost of motor insurance: a policy problem?

8. It is compulsory for motorists in the UK to insure their vehicles against third party risks—the risk of damaging someone else's property or causing death or bodily injury to others.[18] Most drivers purchase comprehensive insurance, to cover risks to themselves as well, and some buy extra cover so that they can recover excess payments when involved in accidents for which they were not at fault or pursue personal injury claims without risk of incurring costs to themselves. Motor insurance in the UK is provided under a fault-based scheme, whereby the company that insured the party who was at fault for a motor accident foots the bill for vehicle repair, the provision of a replacement vehicle, damages because of personal injury, legal costs, and any other costs associated with the claim. Insurance firms often dispute liability for an accident and such disputes must sometimes be resolved in court.

9. The high cost of motor insurance can cause a number of policy problems for the Government to deal with:

  • Many people are reliant on their cars to get to and from work and for social reasons, particularly in rural and semi-rural areas where public transport provision is limited. There is a risk that high premiums will force some people to give up their cars, or deter young people from driving at all, which would have a significant effect on their lives and on local communities.
  • High premiums are likely to encourage some people to drive without insurance, in contravention of the law.[19] The costs incurred by uninsured drivers when they are involved in accidents are borne collectively by the insurance industry and are therefore reflected in premiums. An increase in the number of uninsured drivers leads to still higher premiums.
  • High premiums are also likely to increase the incidence of insurance fraud. Several forms of insurance fraud were mentioned by witnesses, including "fronting", whereby young drivers avoid high premiums by claiming that their parents are the main drivers of their cars and providing false information, or failing to provide relevant information, to an insurer, for example about previous claims.[20] Fraud is, of course, illegal and, as with uninsured driving, law-abiding drivers pick up the bill.

10. There was widespread agreement amongst witnesses that motor insurance is sold in a competitive market,[21] although with a divergence of views about whether the market was working well.[22] We note that the Office of Fair Trading has been investigating the use by insurers of specialist software to access information about their competitors' future pricing intentions, and identified an increased risk of price co-ordination.[23]

11. One of the principal issues raised with us was the payment of referral fees for business within the insurance market: for example, many solicitors pay a fee to insurance or claims management firms in order to pursue a personal injury claim on behalf of someone injured in a motor accident. The Association of British Insurers referred to this as a "dysfunctional system".[24] The Government is currently considering proposals from Lord Justice Jackson to abolish or cap referral fees.[25] Enterprise Rent-A-Car suggested that the involvement in the market of claims management and credit hire firms inflated costs because of under-regulation of these sectors.[26] This was disputed by the organisations representing firms in these sectors.[27]

12. The Minister, Mike Penning MP, was clear that responsibility for the level of premiums rested with the market, not the Government. He accepted, however, that high premiums were problematic in various respect and said "there are measures we are taking now which I feel will hopefully lower premiums, but I am not necessarily doing it for that specific reason. I am doing it predominantly for road safety and justice reasons".[28] Witnesses broadly agreed with this view.[29] None of our witnesses suggested that it would be desirable for the Government to regulate the provision of motor insurance so that premiums were lowered. Nevertheless, there is scope for the Government to:

  • investigate the role played by legal and regulatory rules in generating the continuing increase in personal injury claims relating to motor accidents and to assess the impact of changing these rules on access to justice;
  • assist the police and the insurance industry in tackling fraud more effectively;
  • clamp down on uninsured driving; and
  • ensure that the driving test properly prepares young drivers for motoring and look at other ways of ensuring that young drivers are encouraged to drive safely and can demonstrate to insurers their commitment to doing so.

13. These areas of activity would all be likely to assist in lowering premiums, particularly for young drivers, without interfering with the functioning of the market. We consider each in turn in the chapters which follow.

1   Ev 66. Back

2   Ev 61, paragraph 2.3.1. Back

3   Ev 43, paragraphs 3-5. The index has recently changed named and is now the Watson index. Back

4   Ev 80 and Qq198-201, 244. Back

5   Ev 89. Back

6   Ev 44 paragraph 11, Ev 44-45, section 2, Ev 50-51 paragraphs 2.6 and 3.2, Ev 61, paragraph 2.43, Ev 69, paragraph 1.1 and Qq 35-37, 137, 158, 207, 209, 213-14. Back

7   Ev 55 paragraph 3.6, Ev 79 paragraph 6.5 and Qq 143-44, 233. Back

8   Q177. Back

9   Ev 67. Back

10   Announcement by AA "Bad news for motorists and home owners as insurance premiums keep rising, AA Index shows", 21 January 2011. Back

11   Ev 66. The European Court of Justice ruled on 1 March that insurers will no longer be able to charge different premiums to men and women because of their gender. Back

12   Q69. Back

13   Ev 58, paragraph 7.1.1. Back

14   Ev 62, paragraphs 3.3.1, 3.3.6 and see 3.3.7. Back

15   Ev 73. Back

16   Reported Road Casulaties Great Britain, Main Results 2009, DfT, Statistics Bulletin 10 (17) and Back

17   Information from the Office for National Statisics, Back

18   Road Traffic Act 1988, part VI. Back

19   Ev 56 paragraph 5.3.1. Back

20   Ev 48 paragraphs 2.20-2.21, Ev 56-57 paragraphs 5.3.2-5.3.4and Qq29-32. Back

21   For example, Q191 and Ev 46-47 paragraph 2.6. Back

22   Ev w10-11, Ev w24 paragraph 1.1 and Q191. Back

23   "Motor insurers agree to limit data exchange after OFT investigation", OFT press release, 04/11, 13 Jan 2011. Back

24   Q116 and Ev 77 paragraph 4.8. Back

25   Proposals for Reform of Civil Litigation Funding and Costs in England and Wales: Implementation of Lord Justice Jackson's Recommendations, Ministry of Justice, Consultation Paper Cp 13/10, November 2010, Cm 7947, (hereafter Government response to Jackson), section 3.1. Back

26   Ev w 29-30 sections 3 and 4; and also Ev 45-46 paragraph 1.5, Ev 51 paragraph 3.6, Ev 69 paragraph 2.4, Ev w34-35 section 3 and Q157. Back

27   For example Ev 79 section 7. Back

28   Q287. Back

29   For example Q191. Back

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