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) The reasons and consequences of recent
increases in the cost of motor insurance.
- (2) The impact on young people of the high
costs of motor insurance.
- (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) 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:
- ¾ The
bodyshops/the accident repair centres.
- ¾ The
- ¾ The
suppliers to the industry.
ABP Club would welcome the opportunity for further
discussion on any of the points mentioned in our submission.
- 1 PAGE SUMMARY
There are many different factors affecting the cost
of motor insurance in the UK.
- ¾ Some
are unavoidable due to legislation eg motor insurance has to have
unlimited third-party liability, the cost of uninsured drivers.
- ¾ Some
are outside the control of the motor insurers eg weather, accident/claims
frequency, vehicle design (and hence repair cost).
- 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.
- 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
Personal lines business
- ¾ Private
motor - comprehensive.
- ¾ Private
motor - non-comprehensive.
- ¾ Motor
Commercial lines business
- ¾ Fleets.
- ¾ Commercial
- ¾ Motor
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
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
7% is spent on fraudulent claims
6% is spent on theft and fire claims
5% is spent on paying claims arising from uninsured
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
15% first party non-injury costs from accident damage
3% windscreen costs
100% Total CLAIMS Cost
LIST OF THE 40 MOTOR INSURANCE COMPANIES
IN THE UK
||2009 Gross writtenmotor premium
||2008 Gross written motor premium|
|1||RBS Insurance Group (Direct Line, Churchill, UKI, NIG)
|2||Aviva Group (formerly NU)
|6||LV (Liverpool Victoria) (inc Highway)
|7||Axa (inc Swiftcover)
|9||Ageas (formerly Fortis)
|12||Equity Red Star (IAG = Insurance Australia Group)
|13||Acromas (AA + Saga) formed Sept 2007
|15||Quinn [In administration since Mch 2010]
|16||Markerstudy (inc Zenith / Link from Jan 2010)
|21||Sabre (Binomial Group / BDML)
|22||HSBC (formerly Corinthian) Ceased business in Sept 2009
|23||Amlin (Summit Motor Policies)
|24||Tradex (inc Westminster Motor)
|25||KGM (Lloyds Syndicate 260)
|27||Travellers (St Paul)
|29||First Central Insurance [began Oct 2008]
|33||Ecclesiastical (inc Ansvar) (Allchurches)
|34||Jubilee (Lloyds Syndicate 5820)
|37||Ins Corp Channel Isles (RSA)
|38||Octagon Insurance [began Nov 2009]
|39||Insurethebox [began June 2010]
|40||Liberty Syndicate [begins motor at end of 2010]
Motor insurance is compulsory in the UK - to drive a car you must
be insured for third party liability and that must be unlimited
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.
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
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
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."
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
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 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!
Supplier rebates are often demanded by insurers from companies
who are supplying the bodyshops where the insurers cars are being
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:
- ¾ credit
hire companies (for sending them details of their innocent policyholders
who have been hit by a guilty third party insured with another
- ¾ Personal
injury lawyers ((for sending them details of their innocent policyholders
who have been injured by a guilty third party insured with another
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
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
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
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,
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
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
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
- ¾ How
the motor claims community can be its own worst enemy
- ¾ Why
do insurers continue to allow growth in referral fees?
- ¾ The
continuing headache of credit hire
- ¾ The
practices in subrogated recoveries
- ¾ How
have some insurers been off-setting the costs of "at-fault"
claims from the "non-fault" claims?
- ¾ Are
savings being passed onto the policy holder?
- ¾ Are
these practices ethical and fair?