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
- ¾ Increased
frequency of bodily injury claims.
- ¾ Increased
credit hire costs.
- ¾ Increased
- ¾ Increased
fraudulent and uninsured activity.
- ¾ The
current civil compensation model.
2. THE REASONS
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,
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
Data released by RoSPA in June of this year reported
a 12% decrease in road deaths in the UK.
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
- ¾ Bodily
Injury frequency has increased by 24% from 2005 to 2009 (6% per
- ¾ The
proportion of Third Party Property Damage claims with a personal
injury element increased by 36% from 2005 to 2009 (8% per annum).
- 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.
- ¾ The
number of claimants per claim has increased 28% between 2005 and
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
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.
3. THE IMPACT
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,
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:
- ¾ Young
drivers are much more likely to make a claim than other drivers;
- ¾ Young
drivers are more likely to be at fault in a collision for which
they make a claim than other drivers;
- ¾ When
taking the same unnecessary risks as other drivers, such as speeding,
young drivers are much more likely to cause a collision;
- 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;
- 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
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
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
The additional cost of monitoring and detecting application
fraud itself is one which has to be factored into an insurer's
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:
- ¾ Improved
training including a, say, 12-month minimum learning period
- ¾ Raised
standards in the driving test
- ¾ Actions
to encourage young drivers to carry fewer passengers
- 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
4. THE EXTENT
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
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".
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.
5. WHETHER THERE
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
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
(ROSPA: http://www.rospa.com/news/releases/default.aspx?id=864). Back
Drivers - Reforming Learning to Drive", Association of British
Insurers, 2008 Back
"General Insurance Claims Fraud", Association of British
Insurers, 2009. Back