The cost of motor insurance - Transport Committee Contents

Written evidence from ABP Club (Auto Body Professionals Club) (CMI 10)

The Transport Committee has agreed to hold a short inquiry into the cost of motor insurance, focusing on:

1. (1)  The reasons and consequences of recent increases in the cost of motor insurance.
2. (2)  The impact on young people of the high costs of motor insurance.
3. (3)  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.
4. (4)  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.

N.B. This submission is only commenting on items 1 and 3 on the list above.

The ABP Club is a Club for anyone involved in the UK body repair industry (also known as accident repair industry). Around five million damaged cars are repaired each year at a cost of around £5 billion.

The Club was founded in 2004 and has 1,500 members from all sides of the industry including:

1. ¾  The bodyshops/the accident repair centres.
2. ¾  The motor insurers.
3. ¾  The suppliers to the industry.

ABP Club would welcome the opportunity for further discussion on any of the points mentioned in our submission.

KEY POINTS - 1 PAGE SUMMARY

There are many different factors affecting the cost of motor insurance in the UK.

1. ¾  Some are unavoidable due to legislation eg motor insurance has to have unlimited third-party liability, the cost of uninsured drivers.
2. ¾  Some are outside the control of the motor insurers eg weather, accident/claims frequency, vehicle design (and hence repair cost).
3. ¾  Some come into the category of the insurers "could do better" to control eg fraud, credit hire, salvage disposal from total losses / write-offs.
4. ¾  Some are caused by the insurers themselves eg referral fees insurers require from lawyers and credit hire companies, rebates required by insurers from suppliers to the bodyshops repairing cars. Insurers are aware of these issues but are reluctant to change.

The UK motor insurance market is dominated by a few major players with the top five insurers having 54% of the total market and the other 35 motor insurers sharing the remaining 46%.

In contrast the largest bodyshop company has less than 3% of the repair market - so we very much have a "farmers and supermarkets" scenario.

The UK motor insurance market is generally categorised as shown:

Personal lines business

1. ¾  Private motor - comprehensive.
2. ¾  Private motor - non-comprehensive.
3. ¾  Motor cycle.

Commercial lines business

1. ¾  Fleets.
2. ¾  Commercial vehicles (non-fleet).
3. ¾  Motor other.

The UK motor insurance market is highly competitive with consumers enjoying some of the lowest rates in the EC. The branding of motor insurance has been a feature of recent years, with brands such as Marks and Spencer, Post Office, tesco, putting their name to a motor insurance product - however that product is underwritten by one of the 40 motor insurance companies.

The purchase of personal lines motor insurance is dominated by the comparison websites (also known as aggregator sites) - such as Comparethemarket.com, confused.com, gocompare.com - whereby the consumer can submit their details once and the comparison site then obtains quotes from up to 100 different insurance providers in seconds.

HOW MOTOR INSURERS SPEND THE MONEY

The spend of the average premium:

The 9 June 2010 issue of Auto Express magazine, had an article investigating how insurers spent the average £616 comprehensive insurance premium.

The article said they "have been given unprecedented access to insurance company files in a bid to uncover just what our premiums are spent on." The Auto Express information is "taken from a source within one of the country's biggest insurers who wanted to remain anonymous."

31% is spent on vehicle repair

17% is spent on the insurers operating costs

17% is spent on personal injury compensation

11% is spent on the legal bills from the personal injury cases

7% is spent on fraudulent claims

6% is spent on theft and fire claims

5% is spent on paying claims arising from uninsured drivers

5% is the government insurance premium tax (IPT)

100% total premium income

The claims spend

In November 2007, Highway Insurance (which has since been acquired by LV Insurance) published details of their total claims cost between September 2006 and August 2007.

N.B. This is just looking at the claims spend

34% third party non-injury costs

16% third party personal injury costs

13% third party costs

18% first party non-injury costs from total losses and theft

15% first party non-injury costs from accident damage repairs

3% windscreen costs

100% Total CLAIMS Cost

LIST OF THE 40 MOTOR INSURANCE COMPANIES IN THE UK

Posn	Company	2009 Gross writtenmotor premium	2008 Gross written motor premium
1	RBS Insurance Group (Direct Line, Churchill, UKI, NIG)	c£2,550m	£2,630m
2	Aviva Group (formerly NU)	£1,172m	£1,514m
3	RSA	£1,045m	£1,171m
4	Zurich	c£800m	c£840m
5	Admiral Group	£939m	£805m
6	LV (Liverpool Victoria) (inc Highway)	£634m	£492m
7	Axa (inc Swiftcover)	£561m	£487m
8	Esure	£459m	£472m
9	Ageas (formerly Fortis)	£455m	£483m
10	NFU	£437m	£404m
11	Allianz	c£360m	c£380m
12	Equity Red Star (IAG = Insurance Australia Group)	£284m	£285m
13	Acromas (AA + Saga) formed Sept 2007	c£270m	c£250m
14	CIS	£260m	£230m
15	Quinn [In administration since Mch 2010]	c£250m	£243m
16	Markerstudy (inc Zenith / Link from Jan 2010)	c£170m	c£150m
17	Provident (GMAC)	£165m	£188m
18	Groupama	c£160m	c£180m
19	Chaucer	£159m	£132m
20	Brit	£115m	£87m
21	Sabre (Binomial Group / BDML)	£99m	£87m
22	HSBC (formerly Corinthian) Ceased business in Sept 2009	£98m	£207m
23	Amlin (Summit Motor Policies)	£92m	£72m
24	Tradex (inc Westminster Motor)	£90m	£81m
25	KGM (Lloyds Syndicate 260)	£79m	£63m
26	MMA	£78m	£110m
27	Travellers (St Paul)	£60m	£35m
28	Service Underwriting	£60m	£60m
29	First Central Insurance [began Oct 2008]	£50m	£1m
30	Aioi	£32m	£33m
31	Chartis UK	c£25m	c£25m
32	QBE	c£20m	c£25m
33	Ecclesiastical (inc Ansvar) (Allchurches)	£18m	£19m
34	Jubilee (Lloyds Syndicate 5820)	c£15m	c£15m
35	Novae	c£10m	c£10m
36	USAA	£9m	c£9m
37	Ins Corp Channel Isles (RSA)	c£5m	c£5m
38	Octagon Insurance [began Nov 2009]	£1m	NA
39	Insurethebox [began June 2010]	NA	NA
40	Liberty Syndicate [begins motor at end of 2010]	NA	NA
	TOTAL	£12,086m	£12,197m

UNAVOIDABLE FACTORS DUE TO LEGISLATION THAT AFFECT THE COST OF MOTOR INSURANCE

Motor insurance is compulsory in the UK - to drive a car you must be insured for third party liability and that must be unlimited liability.

The cost of damage and injuries caused by uninsured drivers is picked up by the Motor Insurers Bureau (MIB) who are funded by a levy on the motor insurers premiums. The MIB deal with over 30,000 such claims a year costing over £500 million a year.

This adds £30 a year to every motor insurance premium.

There is very little that the insurers can do about this - it has to be down to the Police to enforce.

In recent months we have seen record personal injury awards from the courts - £11.15 million awarded in March 2010 to Wasim Mohammed, followed by £13.75 million awarded to Manny Helmot in September and in the most recent case an award of £17.5 million was made to Chrissie Johnson.

These three individuals had all had suffered terrible, life changing injuries, but of course these award payments have to be paid for by other motor insurance premiums.

Many will also remember the tragic Selby crash in 2001 when a car crashed onto a railway line, resulting in 10 deaths and 82 serious injuries. The insurance press has suggested that the total cost paid out by the insurer of the car driver was in excess of £50 million - and his premium was just £285.

FACTORS OUTSIDE THE CONTROL OF THE MOTOR INSURERS AFFECTING THE COST OF MOTOR INSURANCE

The weather is obviously a factor outside the insurers control but it does have a big effect on the cost of claims; bad weather increases the frequency and severity of motor claims costs.

Accident frequency (how often policyholders have accidents) is obviously outside the control of the insurers, but they do have some influence over claims frequency (how often the policyholder makes a claim).

Insurers can increase the excess (the amount of the claim payable by the policyholder) or reduce the no-claims bonus in the event of a claim; both of these actions can make consumers decide not to make a claim after they have had an accident.

A recent trend is for some insurers to add a further excess if the consumer wishes to take their car to a repairer of their choice, rather than using the insurance company's chosen repairer.

Vehicle design has a large part to play in the cost of motor insurance.

The built-in safety features in cars has improved dramatically in the last 10 years; cars are built of stronger steel with "safety cages" to protect the occupants; pedestrian safety has been introduced into vehicle design - all aimed at reducing the death and injuries caused in an accident.

This has been clearly demonstrated through the EuroNCAP crash-test programme.

Crash avoidance technologies are now being introduced into cars such as brake assist, pedestrian detection, radar operated cruise control - all aimed at avoiding the accident taking place.

There is an inevitable "knock-on" cost to this technology - the cars are becoming more complicated and hence expensive to repair.

This is clearly illustrated by the following comment from Anna Reynolds of the SMMT in July 2006:

"The priority of the motor industry is to design safe cars for occupants and the increasingly vulnerable road users like pedestrians. Soft bumpers are part of the energy absorbing characteristics of front and rear-end design. They ensure the car, not the occupant or pedestrian takes the strain in an impact at any speed.

A return to bolt-on, rigid bumpers might save the insurance industry money in certain low speed accidents. However, this would be a huge leap backwards in car safety and the drive to cut death and injury on UK roads."

FACTORS AFFECTING THE COST OF MOTOR INSURANCE WHICH THE INSURERS "COULD DO BETTER" AT CONTROLLING

Fraudulent claims are on the increase - especially the so-called "crash for cash" scams.

This is usually where someone deliberately gets someone to crash into the back of their car and then makes claims for personal injuries and repair costs considerably in excess of the norm.

The insurers are using technology to try and link up these fraudulent claims and are having some success.

There is more that can be done in this area, but the insurers have to be careful of not alienating genuine claimants. Insurers also need more Police co-operation in bringing suspects to court.

The credit hire market is one which many insurers have claimed are costing around £30 per policyholder.

Credit hire is where the innocent victim of a car accident can use the services of a credit-hire company to provide them with continued mobility in the form of a hired car whilst their claim is being settled.

The cost of the car hire are recovered by the credit hire company from the "at-fault" insurer.

The credit hire companies charge a much higher rental fee than could be obtained by visiting your local branch of Hertz / Avis etc.- but they are providing the hire car on a credit basis until they recover the costs, often many months later.

The credit hire market has several large players including Helphire, Accident Exchange, AI Claims and Drive Assist.

Credit hire came into existence due to the insurers failing to look after the innocent party; it has now become a £500 million market which is all payable by the insurers. However the relationship between insurer and credit hire operator is now changing - see below.

Salvage disposal occurs when the insurer declares a vehicle to be a write-off / total loss; the vehicle is deemed to be beyond economic repair. Around 550,000 cars a year are written-off by the insurers.

The vehicle is categorised by the insurer, depending on the damage severity, and is then sold by a salvage company such as Copart or Blue Cycle. The sale is usually done via an on-line auction.

Many of these are bought by small one-man band businesses who then repair them (often using incorrect repair methods) and sell them to the unsuspecting public.

The repair of such vehicles is totally legal, however no check is made of their roadworthiness before they are sold.

The insurers then end up insuring the vehicle for a second time - having declared it beyond economic repair a few months earlier!

FACTORS AFFECTING THE COST OF MOTOR INSURANCE WHICH ARE CAUSED BY THE INSURERS THEMSELVES

Supplier rebates are often demanded by insurers from companies who are supplying the bodyshops where the insurers cars are being repaired.

This happens with paint companies and parts suppliers.

The insurer agrees a rebate with the supplier in return for the insurer "requiring" the repairer to use their particular brand of paint or purchasing their parts.

This naturally distorts the market as shown in the price of paint which has increased by 57% since 2003 compared to the RPI increase of 25.6% in the same period.

Referral fees are a major area where the insurers could do much to reduce the costs.

Insurers get referral fees from:

1. ¾  credit hire companies (for sending them details of their innocent policyholders who have been hit by a guilty third party insured with another insurer)
2. ¾  Personal injury lawyers ((for sending them details of their innocent policyholders who have been injured by a guilty third party insured with another insurer)

These referral fees are paid by the lawyers and credit hire companies by increasing the fees charged to the other insurer!

Many in the industry believe that these referral fees are causing an increase in the number of personal injury claims as innocent policyholders are often "encouraged" by their own insurer to pursue a claim as their insurer will financially gain from this in the form of a referral fee from the lawyer they pass the case to.

An average referral fee for a standard small personal injury case such as whiplash is around £500, rising substantially for more severe (and hence more expensive) cases.

Credit hire referral fees are typically around £200 per case.

Thus we have a great money-go-round with each insurer gaining at the cost of another insurer.

The loser is the policyholder. This whole issue is perhaps the biggest cause of rising motor insurance premiums.

At the insurance Post magazine Motor Claims conference in April 2007, Tony Emms, claims director of Zurich Insurance said:

In the credit hire world there are 1.7 million non-fault claims of which 350,000 are captured by credit hire companies to a value of £500 million.

Accident claims had fallen year-on-year for the past ten years.

Since year 2000, third party Personal Injury claims have increased by 100% costing £2 billion in legal costs. He asked, "are insurers feeding this problem by accepting referral fees?"

Third party property claim had risen by 145% since 2000 with credit hire being the main cost "being artificially high due to the referral fees often paid to other insurance companies".

Tony summed up by stating "there are too snouts in the trough making a profit out of accident, which has dramatically increased claims cost. We need transparency of costs".

A more recent article written by Graham Gibson of Allianz Insurance in Insurance Times, August 2009 shows the insurers are aware of the issue but there is a reluctance to address it:

Graham Gibson, director of claims, Allianz Insurance states his view on the practice of referral fees, saying its time for the industry to get its house in order:

In these turbulent times, I think we can be certain that the insurance industry will not escape the scrutiny of the outside world. With this increased interest will come greater questioning about our practices. What we have to ask ourselves is: "Are we happy with what they will find?"

There is one area of practice in our industry which cannot be attributed to the current economic madness, and it would be unrealistic to think that it will continue to remain unchallenged. I'm talking about referral fees.

It is a commonly held view that the credit hire market is saturated but, in the continued drive for revenue, attention has now turned towards referring personal injury claims, which is causing a marked increase in claims frequency. Indeed, it seems that the procurement arms of most insurers are now building revenue generation and conversion targets into agreements which, put simply, is unrealistic.

I read AXA chief executive Philippe Maso's recent comments in Insurance Times with interest, as he quite rightly highlighted that referral fees are damaging for all insurers and called for radical industry action.

I, amongst others, have in the past called referral fees the "guerilla in the room that nobody wants to talk about". But considering the average legal cost of pursuing a small personal injury claim is £1,400, with the referral fee representing around £700 of that cost and showing no signs of abating, it seems bizarre not to talk about it!

Furthermore, we have recently seen referral fees being built into loss adjuster and supplier models, hitting our customers from another angle. Meanwhile, we continue to expect our policyholders to accept the inevitable increase in their premium without explanation.

In the current economic climate, with greater scrutiny from the FSA, we have to question where the current practice of referral fees sits in terms of our obligations to treat our customers fairly and conduct our business in a transparent way.

If we consider this topic as consumers ourselves, the answer becomes obvious. Would we feel comfortable and accepting of the explanation that a substantial part of our insurance premiums go towards the buying and selling of our claim? The man on the street would quite rightly label this as grossly unfair. And given that it is the consumer's claim, why should they not share in the spoils? After all, non-fault motor claims involving personal injury, credit hire and credit repair could be worth up to £1,000. Not an insignificant sum of money, particularly in current circumstances!

A more recent and worrying development is that of negative commission models. I am amazed that we have reached the point where a broker can make more money from a referral fee than from commissions, leading them to write business in the hope of an accident resulting in a non-fault referral!

Left unchecked, we will see more people wanting to get involved in what appears to be a very lucrative process for some, continuing the upwards spiral of costs even further for us as an industry and, ultimately, our policyholders.

It's time for the insurance sector to get its house in order and learn from the mistakes of our counterparts in other areas of the financial sector. We need to preserve the trust of our paymasters - the consumers - by working together to develop a viable solution that satisfies all those stakeholders involved.

As a final point, the issue of referral fees is to feature at the February 2011 Post magazine Motor Claims conference under the following:

The ethical behaviour of the motor claims community

1. ¾  How the motor claims community can be its own worst enemy
2. ¾  Why do insurers continue to allow growth in referral fees?
3. ¾  The continuing headache of credit hire
4. ¾  The practices in subrogated recoveries
5. ¾  How have some insurers been off-setting the costs of "at-fault" claims from the "non-fault" claims?
6. ¾  Are savings being passed onto the policy holder?
7. ¾  Are these practices ethical and fair?

November 2010

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Prepared 11 March 2011