The cost of motor insurance - Transport Committee Contents

Written evidence from Zurich Financial Services Group (CMI 08)


Zurich Financial Services Group (Zurich) is an insurance-based financial services provider with a global network of subsidiaries and offices in North America and Europe as well as in Asia Pacific, Latin America and other markets. Founded in 1872, the Group is headquartered in Zurich, Switzerland. It employs approximately 60,000 people serving customers in more than 170 countries.

It provides insurance and risk management solutions and services for individuals, small and mid sized businesses, large corporations and major multi-national companies. It also distributes third-party financial services products.

Zurich is a major insurance service provider for both private car and motor fleet. Delivering motor insurance solutions in the United Kingdom, distributed through both direct and brokered channels. In addition Zurich is the leading provider of risk management services and motor insurance solutions to the UK's public services market through its Zurich Municipal division.

As a major stakeholder with a broad spectrum of coverage, we have a wealth of expertise and technical knowledge in this area, Zurich very much welcomes this inquiry into the price of purchasing motor insurance and the opportunity to explain to the Committee, the current market dynamics.

We outline the adverse features Zurich believes are driving higher prices and will expand upon each in the body of our submission:

  1. ¾  Increased frequency of bodily injury claims.
  2. ¾  Increased credit hire costs.
  3. ¾  Increased claims costs.
  4. ¾  Increased fraudulent and uninsured activity.
  5. ¾  The current civil compensation model.


Motor insurance in both the private and commercial sectors is experiencing increased claims costs largely driven by the increase in frequency in bodily injury (personal injury) and credit hire claims. A report published by The Actuarial Profession in October 2010[4], concluded that these increases have added at least £100 onto the cost of an average motor policy over the last two years.

These costs, coupled with a decline in investment income and a fiercely competitive price-driven market, mean that for the majority, the UK motor insurance is currently not a profitable line of business to underwrite.

By way of illustration, motor insurers define their profits in terms of gross written premiums less what is paid for claims and expenses. This is often exhibited as a ratio of the claims and expenses and premium income which is known as the Combined Operating Ratio (COR), with a figure of less than 100% indicating an operating profit. The Financial Services Authority returns for 2008 show the COR for the UK motor insurance industry was 105%. In 2009 this had risen to 120%. In simple terms, for every £1 of premium taken, £1.20 is paid out in claims and other expenses.

Data released by RoSPA in June of this year reported a 12% decrease in road deaths in the UK[5]. Improved vehicle safety and increased public awareness has reduced accident frequency, despite there being more cars on the road. In theory, one would assume that this would lead to a significant reduction in the frequency of injury claims. Paradoxically, the data reveals the opposite is true.

For Zurich, a growing concern is the deterioration in the frequency of third party property damage and bodily injury claims, with more minor injury claims being made, both from drivers and passengers. In 2009, we saw a 12% increase in bodily injury frequency on the prior year.

Using historical data from our private car portfolio, we can illustrate the trend that Zurich has experienced for the period 2005-09:

  1. ¾  Bodily Injury frequency has increased by 24% from 2005 to 2009 (6% per annum).
  2. ¾  The proportion of Third Party Property Damage claims with a personal injury element increased by 36% from 2005 to 2009 (8% per annum).
  3. ¾  Third Party Property Damage cost per settled claim has increased by 40% from 2005 to 2009 (9% per annum). This contrasts with an increase of 14.0% over the same period (3% per annum) for accidental damage to vehicles insured under Zurich's own first-party policies.
  4. ¾  The number of claimants per claim has increased 28% between 2005 and 2009.

Zurich believes this increase in frequency can be directly related to the public perception of easy compensation, with the proliferation of conditional fee arrangements (or "no-win no-fee") advertisements, alluding to easy money to be made from claims.

Another important factor is the growth of the lucrative credit hire market, which is worth in excess of £1.2 billion per annum. Credit hire is the provision of a replacement vehicle, to the non-fault motorist, following an accident. This is done on a credit basis - the claimant has virtually no financial interest in the cost or period of hire - with the credit hire company subsequently looking to recover the hire charges directly from the insurer of the at-fault motorist. A credit hire company, typically, pay a fee in excess of £300 per claim, to its referral source for producing the claim and referral fees within the market are thought to exceed £100 million each year. Both Lord Justice Jackson and, subsequently, Lord Young identify referral fees as one of the primary drivers of the increased frequency of personal injury litigation, having a substantial impact upon the legal costs ultimately paid. Both conclude that the current compensation model is badly in need of reform.

The majority of personal injury claims fall within the "Fast-Track" value range less than £25,000. However, it is also worth mentioning the significant changes to the financial values associated with catastrophic personal injury claims for paraplegic and tetraplegic claimants. Increases in life expectancy, coupled with improvements in medical science mean the cost of long-term care for such claimants has increased dramatically. The multiplier effect is increased when different indices are used to calculate the appropriate hourly rate for care staff and other long term costs.

The introduction of Periodic Payments as a means of funding settlements has led to a supply and demand issue, with few providers willing to offer impaired life annuities. This forces insurers to self-fund these mechanisms often at significantly higher cost - carried on the balance sheet - than previously seen under the lump sum settlement method.


Zurich's experience is that, as a group, young people exhibit particular behaviours when driving motor vehicles which, statistically, make them far more likely to be involved in road traffic accidents than other drivers. We believe that a lack of driving experience and an inclination to take unnecessary risks underpins these beliefs, and our rating and pricing structure for young drivers has evolved to take these features into account.

In 2008, the Association of British Insurers[6], reported that it had conducted research into the factors behind young drivers' poor safety record. Its evidence, "based on 8.5 million motor insurance policies for 2005 and 2006 and for policies involving one driver only, show[ed] that:

  1. ¾  Young drivers are much more likely to make a claim than other drivers;
  2. ¾  Young drivers are more likely to be at fault in a collision for which they make a claim than other drivers;
  3. ¾  When taking the same unnecessary risks as other drivers, such as speeding, young drivers are much more likely to cause a collision;
  4. ¾  Lack of road experience has much more effect on young novice drivers than on other novice drivers; and has the greatest effect on young novice drivers in their first year of driving;
  5. ¾  Carrying passengers increases the risk of a collision for a young driver, and the average number of passengers injured in a collision with a young driver is much higher than in a collision with another driver".

Zurich does not believe that any of these features have diminished since the date of the survey; rather, they remain or have increased since that time and, therefore, continue to contribute to the high cost of motor insurance offered to young people.

It is a basic principle of insurance underwriting that the premium must accurately reflect the degree of risk that is under consideration, having taken these issues into account and drawing upon its own claims experience data, Zurich offers fair and reasonable prices to those consumers who request their policy cover to include young drivers.

However, we are also aware that higher premium costs can, in some circumstances, drive certain undesirable behaviours when proposers apply for insurance cover. In particular, "fronting" remains a significant concern for insurers. Fronting is the term used to describe application fraud which involves the misrepresentation of the use of a motor vehicle by a young driver. Typically, the practice involves an attempt to obtain a motor policy in the parent's name, when the reality of the situation is that the young person is the principal driver and/or owner of the car.

The full impact of fronting on the policyholder usually comes to light after an accident has taken place whilst the vehicle has been under the control of the young driver. The policyholder can find they are uninsured and liable to repay any costs their insurer is legally obliged to make under the terms of the Road Traffic Act.

The additional cost of monitoring and detecting application fraud itself is one which has to be factored into an insurer's operating expenses.

It is acknowledged that an insurers' expenses in providing the service necessary to administer both policy and claims activity is a component of the COR. Over the last decade, the industry has embarked on a number of efficiency steps to remove cost from administrative expenses. This has consisted of centralisation, offshoring, outsourcing, investment in IT, reduction in office premises and streamlining of process. Despite this, the purchase of motor insurance is being driven toward a commodity purchase dictated solely by price. Whilst this may have an attraction to the consumer, ultimately it is unsustainable over the longer term.

The underlying claims frequency, which dictates the pricing differential for young drivers, is also aggravated by factors such as the rise in credit hire and bodily injury claims discussed previously. The combined effects of a high claims frequency and average cost per claim are the main factors in the rising cost of motor insurance for young drivers.

It must be acknowledged that much good work is already being undertaken to address these adverse features and the following initiatives will continue to improve driving skills and reduce claims frequency and costs:

  1. ¾  Improved training including a, say, 12-month minimum learning period
  2. ¾  Raised standards in the driving test
  3. ¾  Actions to encourage young drivers to carry fewer passengers
  4. ¾  Actions to encourage fewer night-time journeys.

Improved driving proficiencies and outcomes will generate better underwriting results for insurers and, if action can be taken to curb the compensation system, this will help improve the loss ratios and make pricing more sustainable over the long term.


Insurance claims costs are influenced by an increase in fraudulent activities among consumers and businesses, particularly so in times of economic pressure and increased financial stress. Zurich believes that the current economic environment has led more insurers to invest heavily in counter-fraud technology and to increase their fraud detection activities which will reduce fraud, both opportunistic and organised, in the longer-term. Insurers are acutely aware of their fiduciary duty to those legitimate policyholders who face increased motoring premiums because of the activities of fraudsters but also wider society in challenging the pervasive nature of exaggerated claims and fraud.

Application fraud (eg "fronting") and claims fraud both contribute to an increased cost of motor insurance. Not only is the premium received inadequate, the average cost per claim is inflated. The need to raise premiums to counter these trends may tempt even more people to avoid paying the correct amount by misrepresentation or not insuring at all. Anecdotal evidence suggests that judicial deterrents for driving a vehicle without insurance are seen by many drivers as being insufficient to counter the inclination to either remain uninsured or commit fraud when making an application.

The incidence of fraud has increased dramatically in the motor insurance market due to the prevailing economic climate. The ABI estimated that £930 million of motor insurance fraud went undetected[7]. This has a negative impact on the motor insurance market and contributes to the overall increase in total claims costs.

However, initiatives such as the Motor Insurance Database (MID) and Government campaigns have helped to combat uninsured driving. The Motor Insurers' Bureau states that "uninsured drivers injure 23,000 people and kill 160 each year with total costs to honest motorists of £500 million, paid for through their insurance premiums".[8] Zurich believes the introduction of Continuous Insurance Enforcement will help to deter uninsured driving by imposing penalties for those who choose to drive without insurance cover (ranging from an initial fixed penalty to seizure and vehicle destruction for repeat offenders). However, while combating uninsured driving is expected to exert overall downward pressure on motor claims costs, there is a risk that application fraud may increase as motorists seek to be seen to be insured by having an ostensibly valid policy on the MID.


Motor insurance is a compulsory class of insurance. Therefore, there are a number of public policy implications should the cost of motor insurance be perceived as prohibitively expensive, leading to an increase in those driving without insurance or obtaining cover fraudulently.

An individual prepared to enter a motor insurance contract fraudulently is just as likely to continue that behaviour in other walks of life. In addition to fraud and uninsured driving which has consequences for the innocent motorist, the insurer, law enforcement agencies and the National Health Service, there is also the pervasive impact of the compensation culture which the Government has already indicated a willingness to address.

In terms of steps the Government is taking, there is already helpful work underway in response to the rising cost of motor insurance.

Zurich recognises that there is a legitimate balance between the interests of access to justice and the excess created by a compensation culture.

Zurich has supported access to justice at proportionate cost and the provision of fast compensation for those injured through no fault of their own. Claimants need first and foremost access to justice and advice, a fair, fast and cost effective process and swift recompense.

The Ministry of Justice "Low Value RTA Claims Process" came into effect on 30 April 2010 and although it is still early to reach a final conclusion on its impact, it is seen as a significant step in the right direction. Proposals to extend this fast-track approach further to claims up to £25,000 would be another step in the right direction.

Under this process, claimants' costs are fixed with a transparent claims process and timeline, preventing unnecessary work by the lawyer. It will take more time to accurately judge whether the new process has really had a positive effect on stemming the flow of unmeritorious claims but initial signs do appear to be positive. Zurich is already seeing faster settlements which allows the injured party to receive damages payments earlier.

Other important developments include the Jackson Review of Civil Litigation and Lord Young's recent report into the Compensation Culture. Both of these recommend reform of Conditional Fee arrangements, After the Event Insurance, advertising and referral fees, all of which Zurich believes to be culpable for the increase in third party claims costs and, ultimately, motor insurance.

Though any reform will take time and involve complex issues, as well as a range of stakeholder interests, the forthcoming consultation on the implementation of these proposals does afford the UK a real opportunity for implementing much-needed change.

In conclusion, Zurich accepts that from time to time the vagaries of the free market are likely to create soft and hard markets. Currently, the economic climate and soft market make profitable underwriting on motor insurance impossible, which is driving the market correction and higher prices. We do, however, see some serious structural flaws within the current operating market that, if left unchecked, will continue to erode profitability in the market with the inevitable consequences of withdrawal from the market and a reduction in competition. If we act now to tackle the issues we have identified within the compensation system through the Young and Jackson reviews then we believe equilibrium could be restored.

November 2010



5   (ROSPA: Back

6  "Young Drivers - Reforming Learning to Drive", Association of British Insurers, 2008 Back

7   "General Insurance Claims Fraud", Association of British Insurers, 2009. Back

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