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.
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.
The Confused.com/EMB insurance price index has reported similarly
hefty increases in premiums quoted to motorists over the last
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:
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.
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.
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.
Some witnesses suggested that premiums moved in cycles,
although the AA's Premium Index provides little support for this
theory for the period from 1994.
Bearing out the predictions of the Association of British Insurers
(ABI) and others, premiums have continued to rise into 2011.
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.
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".
Confused.com told us that people under 25 accounted for 31% of
motor accidents and 40% of claims costs.
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".
The Government told us that "as many as a fifth of newly-qualified
drivers make a claim within six months of passing their test".
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.
This is part of a longer term trend: the number of casualties
per 100 million vehicle kilometres has fallen by 75% since 1967.
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
8. It is compulsory for motorists in the UK to insure
their vehicles against third party risksthe risk of damaging
someone else's property or causing death or bodily injury to others.
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.
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.
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,
although with a divergence of views about whether the market was
working well. 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.
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
Government is currently considering proposals from Lord Justice
Jackson to abolish or cap referral fees.
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.
This was disputed by the organisations representing firms in these
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".
Witnesses broadly agreed with this view.
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:
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;
- 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
Ev 61, paragraph 2.3.1. Back
Ev 43, paragraphs 3-5. The index has recently changed named and
is now the Confused.com/Towers Watson index. Back
Ev 80 and Qq198-201, 244. Back
Ev 89. Back
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
Ev 55 paragraph 3.6, Ev 79 paragraph 6.5 and Qq 143-44, 233. Back
Ev 67. Back
Announcement by AA "Bad news for motorists and home owners
as insurance premiums keep rising, AA Index shows", 21 January
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
Ev 58, paragraph 7.1.1. Back
Ev 62, paragraphs 3.3.1, 3.3.6 and see 3.3.7. Back
Ev 73. Back
Reported Road Casulaties Great Britain, Main Results 2009, DfT,
Statistics Bulletin 10 (17) and http://www.dft.gov.uk/pgr/statistics/datatablespublications/accidents/casualtiesmr/rrcgbmainresults2009. Back
Information from the Office for National Statisics, http://www.statistics.gov.uk/cci/nugget.asp?id=1208. Back
Road Traffic Act 1988, part VI. Back
Ev 56 paragraph 5.3.1. Back
Ev 48 paragraphs 2.20-2.21, Ev 56-57 paragraphs 5.3.2-5.3.4and
For example, Q191 and Ev 46-47 paragraph 2.6. Back
Ev w10-11, Ev w24 paragraph 1.1 and Q191. Back
"Motor insurers agree to limit data exchange after OFT investigation",
OFT press release, 04/11, 13 Jan 2011. Back
Q116 and Ev 77 paragraph 4.8. Back
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
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
For example Ev 79 section 7. Back
For example Q191. Back