Written evidence from Saga Group Ltd (CMI
1. The Transport Committee is holding a short
inquiry into the cost of motor insurance, focusing on:
- ¾ The
reasons and consequences of recent increases in the cost of motor
- ¾ The
impact on young people of the high costs of motor insurance.
- ¾ 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.
- ¾ 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.
2. Saga Group is the pre-eminent provider of
services, including motor insurance, to the over 50s in the UK.
The motor insurance sold by Saga is provided by our in-house insurer
Acromas Insurance Company Limited (formerly Saga Insurance Company
3. This submission from Saga Group considers
the first, third and fourth of the issues raised by the Transport
Select Committee. As we are focused on those aged 50 and over
we have not commented on the issue of young drivers.
4. The cost of motor insurance in the UK has
risen substantially since the middle of 2009. The most recent
AA private motor insurance "shop around" index showed
an average increase of 40% from the third quarter of 2009 to the
third quarter of 2010. A number of other market commentators produce
price indices that all show similar increases to the AA index.
5. These are unprecedented increases for the
motor insurance market.
6. The primary driver of these increases in premiums
is an increase in personal injury claims costs for motor insurers.
Personal injury claims have significantly increased motor insurers
overall claims payouts which has necessitated large increases
in premiums. We, like other motor insurers, have seen a significant
increase in personal injury claims in recent years.
7. The Institute of Actuaries Third Party Working
Party has recently completed an analysis of trends in motor insurance
in the UK based on pooled data from a large number of insurers.
This data showed that:
- ¾ The
number of road traffic accidents has been falling since 2007.
- ¾ The
number of personal injury claims arising from these road traffic
accidents has been increasing rapidly in the same period.
- ¾ The
average cost of these personal injury claims has also been rising
- ¾ The
total effect of increasing numbers of personal injury claims and
the increasing average costs of personal injury claims has increased
insurers' bills for personal injury claims by 30% per annum. This
is a massive increase against the background of reducing accident
8. In our view, the primary driver of the increased
number of personal injury claims is the aggressive advertising
tactics used by claims management companies. These organisations
seek to find individuals who have been injured and pass them onto
personal injury lawyers. The personal injury lawyer pays the claims
management company a referral fee for each potential personal
injury claimant. The claims management companies have engaged
in increasingly aggressive marketing in recent years including:
- ¾ Extensive
newspaper and television advertising.
- ¾ Cold
- ¾ Cold
emails and text messages.
- ¾ Assumptive
questioning tactics and the "leading" of actual and
- ¾ Pressurising
those involved in road traffic accidents to make personal injury
9. The aggressive advertising tactics used by
claims management companies are generating a "compensation
culture" in the UK by encouraging people to seek compensation
for any accident or injury. In addition, there has been an increase
volumes of fraudulent claims. The frauds take a number of different
forms of which the most common are:
- ¾ Fabricated
accidents where no accident has taken place but the parties nevertheless
conspire to put forward personal injury claims.
- ¾ Deliberate
accidents (co called "crash for cash") perpetrated by
- ¾ Exaggeration
of injuries suffered in a genuine accident in order to increase
- ¾ Multiple
vehicle occupants fraudulently claiming to be injured as the result
of an accident. Typically, the condition alleged is mild neck
10. It is not just motor insurers who will have
experienced increases in costs due to the "compensation culture"
created by the aggressive advertising tactics employed by claims
management companies. Local government will have seen increasing
claims for alleged injuries arising due to trips and falls. The
National Health Service Litigation Authority report and accounts
for 2010 show very clearly on page 13 that the number of claims
received by the NHS has grown very significantly in the last two
years. For example, clinical claims have grown from 5,470 in 2007-08
to 6,652 in 2009-10an increase of 10% per annum. These
additional claims will impose rising costs on the NHS.
11. The recent rise in motor insurance premiums
affects all motorists in the UK. Young drivers have seen particularly
high increases but the effect on the over 50s have also been significant.
The AA index shows increases of almost 30% in the last year for
drivers aged 50 or over (compared to 40% for all drivers). Such
a substantial increase in premiums will further stretch the budgets
of pensioners, many on fixed incomes, in difficult economic times.
12. Certain areas of the UK have seen particularly
high increases in premiums. In our view it is no coincidence that
the highest motor insurance premiums are payable by consumers
who live in areas with very large numbers of claims management
companies (the M62 corridor in the North West being an example).
13. The cost of motor insurance is primarily
driven by the cost of motor insurance claims. The inquiry suggests
a number of factors that may have an effect on motor insurance
prices and we have commented on the importance of each below
Prevalence of road accidents
14. The prevalence of road accidents is of course
a key determinant of motor insurance prices. In recent years,
the prevalence of motor accidents has declined which might suggest
that motor insurance claims should have declined. However, as
discussed above, the beneficial effect of lower accident claims
("bent metal") has been more than offset by the increase
in the number and cost of personal injury claims.
15. Insurance fraud has caused part of the recent
increase in motor insurance prices. The ABI estimates (ABI, General
Insurance Claims Fraud, 2009) that £930 million of motor
insurance fraud went undetected in 2009 which they estimate adds
£39 to the cost of an average motor premium.
16. We have a significant team dealing with insurance
fraud. There are many patterns in these claims but two of the
more interesting issues are:
- ¾ Fraud
is more common in areas of the country with a high density of
claims management companies.
- ¾ We
see increasing volumes of more sophisticated fraud rings which
are often fabricating accidents to try to make fraudulent personal
injury claims. Often a firm or firms of solicitors are central
to such rings. In our view it is important that the Solicitors
Regulation Authority ("SRA") acts proactively to deal
with errant members of the legal profession.
17. Legal costs have been an important driver
of the increase in motor insurance premiums. Approximately half
of the claims on a motor insurance policy relate to personal injury
claims. On the Saga motor account approximately 40% of the amounts
paid out for personal injury claims goes to lawyers with the remaining
60% going to the injured party. Thus legal costs account for approximately
20% of insurance premiums.
18. For small bodily injury claims where damages
of between £1,000 and £5,000 are paid, our experience
is that claimant legal fees are, on average, only very slightly
below the level of damages paid to the injured party. Small claims
below £5,000 are the vast majority of bodily injury claims
by number and represent a large proportion of insurers' costs.
19. In our view the legal fees which claimant
solicitors are able to recover in personal injury cases significantly
exceed the true cost of completing the legal work. The changes
in the profession, following the Access to Justice legislation
in 2000, meant that legal firms were allowed to pay referral fees
to claims management companies and other referral sources, usually
in lieu of marketing activity undertaken by the solicitor itself.
The proliferation of claims management companies in recent years
has been a direct result of the referral fees paid by solicitors.
In consequence the marketing by claims management companies has
become more aggressive as those referral fees have been chased.
In a very significant way this has contributed to the increased
frequency of small personal injury claims. Indeed, it is interesting
to see that Scotland has a much lower frequency of personal injury
claims than England. In our view this is because the lower level
of fees which claimant solicitors receive in Scotland for whiplash
and other minor injury cases do not allow them to pay large referral
fees which in turn means that the type of claims farming practiced
by claims management companies in England and Wales is uneconomic.
20. We see no signs that the recently introduced
MOJ (Ministry of Justice) reforms have reduced aggressive advertising
by claims management companies.
21. The insurance industry pays a levy for uninsured
drivers. This levy amounts to approximately 3% of motor insurance
premiums. Thus, at present the level of uninsured driving is not
a key driver of motor insurance premiums.
22. The rise in motor insurance premiums is due
to a significant rise in personal injury claims in the last few
years. If personal injury claims are allowed to continue to rise,
the cost of motor insurance will undoubtedly continue to increase
rapidly. This will be increasingly painful for motorists who already
find their family finances stretched by the economic downturn.
Inevitably, some drivers who can no longer afford insurance will
23. In our view the key drivers of the increase
in personal injury claims are (1) claims management companies
with their increasingly aggressive marketing, (2) the rise of
insurance fraud and 3) the ever-increasing compensation culture
(which in turn is fed by (1) and (2)). Unless the compensation
culture is decisively addressed, we believe that motorists will
continue to see rapid rises in their motor insurance premiums.
The NHS and local government will also see ever rising costs of
litigation. The cost of other types of insurance exposed to personal
injury, such as employers' liability, will also increase, placing
an increasing burden on industry and making the UK less competitive.
24. There are a number of possible ways in which
the compensation culture could be addressed. Indeed, the experience
of other countries illustrates some of the possible courses of
- ¾ As
discussed above, Scotland has a different legal system and the
amount which claimant solicitors can recover in minor injury cases
is rather smaller than in England and Wales. These lower fees
mean that solicitors cannot afford to pay large referral fees
or spend large amounts on advertising. We see much lower personal
injury claims in Scotland, much lower levels of claims fraud in
Scotland and our Scottish policyholders enjoy lower motor insurance
- ¾ The
Republic of Ireland had a significant problem with increasing
personal injury claims driving up the cost of motor (and other
liability) insurance to unaffordable levels. Ireland responded
by introducing the Personal Injuries Assessment Board ("PIAB")
in 2003. In simple terms PIAB acts as a conciliation service for
personal injury claims. All claimants are required to use PIAB
initially and legal costs are heavily restricted if the claim
can be settled quickly. The effect of PIAB was to reduce the legal
costs incurred in the process significantly and it led to a large
reduction in motor insurance premiums in Ireland.
- ¾ In
Germany, based on biomechanical evidence, the courts assume that
any accident below 10kph cannot cause whiplash - which removes
a significant part of the low value but high cost claims.
25. However, in our view, if the Government wishes
to restrict the growth of the compensation culture, the best approach
would be to address the primary cause of this growth directly.
We have explained why we believe excessive and inappropriate advertising
for personal injury claims is the primary cause of the compensation
culture and high motor insurance premiums. We believe that the
best solution would be to severely limit the level and type of
advertising permitted by claims management companies and solicitors.
26. In his recent report (Common Sense, Common
Safety) for the Prime Minister, Lord Young of Graffham made a
number of recommendations including restrictions on the type and
volume of advertising by claims management companies and solicitors.
Lord Young discusses this issue on pages 20 and 21 of his report
under the heading "The regulation of claims management companies".
In our view, this is the most important recommendation in Lord
Young's report and is a key step in addressing the compensation