The cost of motor insurance - Transport Committee Contents


Written evidence from moneysupermarket.com (CMI 07)

AN INTRODUCTION TO MONEYSUPERMARKET.COM

moneysupermarket.com is the largest price comparison website in the UK; the insurance comparison channels attracted approximately 24 million visitors in 2009. We offer consumers the ability to compare quotations across 105 car insurance providers in real time.

Our objective is to help every household to make the most of their money. We do this by providing our customers with a free online service enabling them to compare a wide range of products and to find the one most suited to their needs. Our customers can compare products by price, product features and service.

As consumers increasingly research and buy financial products online, price comparison websites continue to become increasingly relevant in the UK motor insurance distribution landscape, accounting for approximately 63% of motor insurance sales. In the last year we have issued 3.2 million insurance quotations and have recognised the rapid rate of inflation in the car insurance market and the impact of recent increases on consumers.

OUR RECOMMENDATIONS FOR ACTION

  1. 1.  The Government should seek to encourage major insurers to utilise existing technical solutions that help to remove entry barriers to customers under the age of 25.
  2. 2.  The Government should strengthen penalties for uninsured driving and fraudulent claims to ensure that the potential fine is greater than the cost of car insurance.
  3. 3.  The Government should continue to reform the structure of compensation claims to limit the costs incurred by insurers. We would like to urge the Committee to ensure that the reform is implemented in a way that will enable insurers to pass on lower risk to consumers.

EXECUTIVE SUMMARY

The UK insurance market has seen an unprecedented rise in premium prices over the past year and young motorists are suffering disproportionately from high insurance costs. Price comparison websites have made the UK car insurance market far more competitive over the past decade, with moneysupermarket.com customers able to save on average £237 on their renewal quote. More consumers than ever switch insurance provider on a regular basis and this has helped slow price rises. Recent rapid cost increases, however, have demonstrated that market transparency is no longer sufficient to prevent rising costs for the motor insurance sector being passed on to consumers.

Steeply rising premiums may be attributed to a rise in accidents involving uninsured drivers, fraudulent claims and the large costs for insurers associated with compensation claims which have become a widespread feature of the motor insurance market in the UK. Insurers have passed on costs incurred by back-dated claims to consumers in the form of premium rises.

Price rises encourage and sustain fraudulent insurance claims and uninsured driving. Both of these practices help create a viscous circle of increasing size and frequency of claims and rising premiums.

The statutory penalties applicable to drivers caught without insurance provide too little incentive for motorists to purchase insurance. Considering the cost of insuring a car, it may prove attractive and even logical to some younger drivers to risk being caught driving without insurance.

Many of the causes of price increases have been specifically associated with young drivers. Insurers pass on this higher risk to new drivers through higher premiums. The high cost of insurance policies for young people means some cannot afford to buy cover.

The insurance industry, therefore, should seek to use new and innovative policies that help them better quantify the risk of individual drivers in order to price policies more effectively and accessibly for younger applicants.

Telematic products already exist that both provide insurers with the information necessary to better quantify risk and determine which drivers deserve to pay more for their car insurance. Unfortunately these types of products have yet to be endorsed by major UK insurers and still account for a very small proportion (less than 1%) of the market.

1. Moneysupermarket.com and Motor Insurance

1.1  moneysupermarket.com welcomes the Transport Select Committee's timely inquiry into the rising cost of car insurance in the UK. Our objective is to help every household to make the most of their money. We do this by providing our customers with a free online service enabling them to compare a wide range of products and to find the one most suited to their needs. Our customers can compare products by price, product features and service.

1.2  moneysupermarket.com is the largest price comparison website in the UK; the insurance comparison channels attracted approximately 24 million visitors in 2009. We offer consumers the ability to compare quotations across 105 car insurance providers in real time.

1.3  As consumers increasingly research and buy financial products online, price comparison websites continue to become increasingly relevant in the UK motor insurance distribution landscape, accounting for approximately 63% of motor insurance sales.

1.4  moneysupermarket.com recognises the rapid rate of inflation in the car insurance market and the impact of recent increases on consumers. This submission outlines a variety of causes to help inform the Committee's inquiry.

2. The rising cost of motor insurance: cause and effect

2.1  The UK insurance market has seen an unprecedented rise in premium prices over the past year. According to figures produced by the AA, fully comprehensive cover now typically costs £704, a year-on-year increase of 31%.[1] moneysupermarket.com believes the rise in price is being fuelled by increases in fraudulent insurance claims, the establishment of a UK "compensation culture", and rise in the number of uninsured drivers on the road. These factors have led to an increase in the size and frequency of claims made by policy holders, with the result that insurers are putting policy prices up to compensate.

2.2  Fraudulent claims: Recent research from moneysupermarket.com shows that 15% of motorists under 35 would consider staging a motor accident to claim on their insurance. Worryingly, one in 20 younger drivers admit they have already done so and got away with it. Association of British Industry figures for last year reveal that over 2,000 dishonest insurance claims worth more than £16 million were detected every week.

2.3  The soaring cost of litigation: The Committee will be aware of recent Government commissioned reviews which highlight the inefficiencies in the UK's personal injury system. These inefficiencies lead to increased costs to individuals. Lord Justice Jackson's review of civil litigation and Lord Young of Graffham's review into health and safety both criticise "no win no fee" arrangements. Lord Jackson recommends that success fees should no longer be recoverable from an opponent in litigation, but be paid out of damages awarded. moneysupermarket welcome the Government's commitment to act on the conclusions of these reviews.

2.4  Maximum Fine: According to official statistics, one in 20 drivers is uninsured. But recent research carried out by pollsters Mori suggests that this figure is more like one in 10 drivers, albeit that the uninsured period in many cases may run to just a few days or a few weeks. This is no comfort to someone who is involved in an accident with an uninsured driver. This adds around £30 to the average annual premium.

2.5  moneysupermarket.com is concerned the statutory penalties applicable to drivers caught using their vehicles without insurance provide little incentive for motorists to purchase insurance, and that this is particularly true of younger drivers. Considering the cost of insuring a car such as the example in paragraph 3.1, it may prove attractive and even logical to some younger drivers to risk being caught driving without insurance.

2.6  The penalties for such an offence are a maximum fine of £5,000 (which a first time offender is unlikely to face) or a fixed penalty notice of up to £200 and six penalty points. When the cost of purchasing and insuring a car outweighs the cost of the statutory penalty for driving without insurance, the public policy intentions of such an offence are skewed. moneysupermarket.com recommends that the government looks to provide harsher penalties for uninsured drivers to encourage the take up of insurance.

3. Younger drivers pay the price

3.1  In 2010, moneysupermarket.com analysed car insurance premiums for drivers of all ages. We discovered that while the cheapest premium for an 18 year old male, driving a 2005 1.4L Ford Fiesta, is £4,897, the average premium is £7,917 - 79% (or £3,494) more than the £4,422 average for an 18 year old female.

3.2  Young males who have a few years of experience on the road will see a considerable drop in premiums, with the average cost for a 19 year old falling to £3,711 - a 53% decrease. Premiums continue to reduce by a significant amount as a driver's age increases from late teens to twenties and thirties.

3.3  To reduce this cost, young people face strong incentives to carefully select a lower risk vehicle and drive carefully. At the same time the cost faced by young drivers, even for those who have taken steps to minimise their insurance premium, can prevent many from being able to own and drive their own vehicle.

3.4  Recent research[2] indicates that millions of parents are said to be breaking the law in order to save money on car insurance for their children. Parents are claiming to be the main drivers on the policy, when in fact it is one of their children who is the main driver, or owner of the car. The practice, known as fronting, potentially offers large savings but could lead to prosecution. Research by Co-operative Insurance[3] found that 41% of parents are fronting policies at the moment.

3.5  High premiums therefore emphasise the need for action from the Government and other agencies to address the underlying poor road safety record of young drivers.

4.  Market innovations will lower costs

4.1  Insurance policies fail to incentivise responsible driving, particularly among the young. The traditional insurers have failed to address this. However, the new market entrants are testing innovative means to encourage drivers, particularly young drivers, to lower their premiums by installing Telematics or "Clearbox" tracking systems onto their vehicles. One particular telematics-based insurance policy aims to influence driving behaviour by incentivising good drivers through its charging structure. This saves young drivers on average at least £200 per year. This product allows insurers to price policies based on evidence of driving practices rather than just age and should prevent a responsible and safe 18 year old driver being punished with higher cost premiums because some of his peers may be reckless.

4.2  Drivers pay for a fixed number of monitored miles, typically 6,000. When the allocation is about to run out they receive email reminders. They can then choose to buy additional miles automatically through their credit cards or bank accounts or opt instead to use top-up principles, similar to mobile phones.

4.3  Telematics technology makes it possible for emergency services to respond rapidly to accidents, reducing the time it takes to get help and potentially saving lives. The box, which is installed onto the vehicle, is capable of alerting the insurer whenever there has been an incident recording a g-force of 2.5 or more, indicating that an accident might have occurred. The insurer can then contact the customer and organise help if needed. Where the box registers a g-force of eight or more, and serious injury is likely, emergency services may be called to the location in cases where the customer cannot be contacted.

4.4  The most extensive trials of telematics have taken place in the United States with organisations such as the Texas Government, General Motors, Safeco and American Family involved in various monitored driving and low mileage discount programmes. After piloting various technologies in a number of different States, Progressive Insurance announced a nationwide roll-out for MyRate in 2008.

5.  The influence of crime

5.1  Steeply rising premiums may be attributed to a rise in accidents involving uninsured drivers, plus an acceptance of "compensation culture" in wider British society - a theory supported by the AA and Consumer Intelligence.

5.2  Car insurance claims brought against illegal drivers cost the industry £1.25 billion a year and the expense is shared out among motorists. More than 23,000 people are injured or killed by uninsured drivers each year according to the Co-operative Insurance. Incident rates are taken into consideration when companies calculate the general price of car insurance policies, and the risk posed by fraudulent and uninsured motorists is a key reason why the cost of cover continues to increase.

5.3  Car insurance fraud and illegal motoring are problems often associated with younger drivers. The high cost of insurance policies for young people means some simply cannot afford to buy cover. We agree that driving without insurance is inexcusable, and common forms of insurance fraud are against the law. However, the industry needs to come up with a solution that means under-25s have access to affordable car insurance cover. As discussed above, the Government should also provide strong disincentives to help reduce driving without insurance by raising the maximum fine.

6. Excess Charges

6.1  Excess charges perform a valuable function in the motor insurance market. Their existence allows both insurers and policy holders increased flexibility in the cost of their premiums. Indeed, customers have also shown appetite for agreeing further voluntary excess payments in which policy holders choose to pay a higher charge in the event of a claim to lower the monthly cost of the premium.

6.2  We are, however, concerned that excess payments demanded by insurers have been increasing in line with car insurance premiums. This is particularly true for younger drivers, who are often forced to agree to high compulsory and voluntary excess payments as a condition of insurance.

6.3  The principal danger of rising excess charges, particularly for young drivers, is that the policy holder would not be able to afford payment in the event of an accident.

November 2010



1  http://www.moneysupermarket.com/c/news/insurers-get-tough-on-fraud/0010083/ Back

2  http://www.bbc.co.uk/news/10241769 Back

3  http://www.cfs.co.uk/servlet/Satellite?c=Page&cid=1263305237429&pagename=Corp/Page/tplCorp&currart=1276241509470&currmth=06 Back


 
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