Written evidence from RBS Insurance (CMI
RBS Insurance is the second largest general insurer
in the UK and is wholly owned by the Royal Bank of Scotland Group. Headquartered
in Bromley, Kent, it has operations in the UK, Germany and Italy.
RBS Insurance continues to be the largest motor insurer in the
UK with a 22% market share. In 2009 RBS Insurance became the UK's
largest home insurer.
RBS Insurance provides a wide range of general insurance
products to consumers through a number of well known brands including;
Direct Line, Churchill and Privilege. It also provides insurance
services for third party brands, through its UKI Partnerships
division. In the commercial sector, its NIG and Direct Line for
Business operations provide insurance products for businesses.
In addition to insurance services, RBS Insurance
continues to provide support and reassurance to millions of UK
motorists through its Green Flag breakdown recovery service and
TRACKER stolen vehicle recovery and telematics business.
The recent steep rise in premiums across the motor
insurance industry is a huge cause for concern for RBS Insurance
and one our staff are confronted with every day. It is important
that we understand exactly why these rises have occurred and our
investigations have shown it is a culmination of many factors.
We hope this evidence will give the Transport Select Committee
an insight into the causes and effects our industry faces. What
follows are short summaries of the different causes that lead
to increases in premiums. In most cases, these have been fuelled
by negative cultural changes in the UK and have become a perfect
storm for insuring the modern driver. If there was one single
factor that has lead to the rise in premiums, it is the rising
compensation culture that this country has witnessed in the last
few years. This is an issue that needs immediate attention and
the effect of doing so will be positively felt by the consumer.
1. THE REASONS
The EMB's annual analysis of the financial returns
made by insurers to the Financial Services Authority, stated for
every £1 motor insurers received in premiums, they paid out
£1.22 in claims. This increase in claims costs is the key
factor in the increased cost of motor insurance. The single biggest
contributing factor to these claims is the increase in personal
injury claims and the associated costs.
Personal injury claims
The continued increase in the number of personal
injury claims is, in RBS Insurance's view, the overwhelming factor
in the rising cost of motor insurance premiums. This is despite
the fact that the frequency of actual accidents has not increased.
The now firmly-established "compensation culture" in
the UK has fuelled the desire for people to seek compensation
for accidents. This has been exacerbated further by the prolific
marketing of the services of no-win no-fee lawyers and claims
RBS Insurance is firmly supportive of those injured
in accidents being quickly and rightfully compensated and, as
such, commends the recent implementation of the Ministry of Justice
Reforms to make the process for smaller claims simpler and quicker.
Currently for every £1 paid in compensation for smaller injury
claims an additional 87 pence is paid in lawyers fees. The ABI
has stated that £41 from every motor insurance policy goes
to the legal profession.
Fraud: The onset of "cash
for crash" fraud is another worrying development for the
industry. There is a rising trend in accidents being staged and
the driver (and passengers) claiming for injuries. The ABI estimates
the cost of motor insurance fraud is £410 million per annum.
RBS Insurance recently surveyed 200 GPs and found they are currently
rejecting as fake nearly one in five patients claiming to have
Case Study: A recent case
saw a genuine accident involving a 31 seater bus generate 34 injury
claims - police investigations found that one passenger who worked
for an accident management company generated £17k in referral
fees by referring all his fellow passengers to solicitors. Almost
all the claims were found to be for injuries that did not exist.
Recent industry analysis has shown that since the
proliferation of claims management companies, the cost of settling
injury claims has increased by around 20% per year and the frequency
has increased by a further 10% per year. It is no surprise, therefore,
that injury claims now make up the majority of our claims spend,
up from under a quarter only two decades ago.
The chart below is taken from our own data. It shows
how the proportion of total claims cost that relate to injury
payments has grown over the last two decades.
Trend of Injury Cost as a Proportion of
Total Claims Spend
Another factor that has increased insurers' claims
costs, and in turn impacted the cost of motor insurance premiums,
is an increase in personal injury settlements in the form of Periodical
Payment Orders (PPO). Under the Courts Act 2003, the courts have
the power to order the settlement of a claim, wholly or in part,
by means of a PPO, whereby the claimant receives some or all of
their damages via regular payments from the insurer. Under a traditional
lump sum settlement, the claimant would invest their money in
order to meet future losses, such as loss of earnings or care
costs. Under a PPO, the investment and mortality risk is transferred
to the insurer - this means that when the clamant dies, the regular
payments cease. These payments are index linked to care costs
and in the current low investment environment have greater cost
implications to insurers.
Whilst the upward trend in personal injury claims
is a major reason for the increased cost of motor insurance, other
contributing factors are:
The proliferation of penalty points
The proliferation of penalty points on drivers' licences
has also had an impact on the cost of insurance premiums. Our
own data, as well as separately commissioned research, has highlighted
approximately 16% of all drivers have (or have informed us of
having) penalty points on their licence.
Our own statistics suggest a driver with one conviction
is 69% more likely to claim than a driver with no convictions.
This increases incrementally the more convictions a driver has:
- ¾ A
driver who has two offences on their licence is 38% more likely
to claim than a driver with one offence.
- ¾ A
driver with three offences is 19% more likely to claim than driver
with two. This greater risk is priced accordingly.
N.B. Other factors which impact motor insurance
costs are uninsured drivers and fraud which we refer to later
within this document.
2. THE IMPACT
RBS Insurance believes that it is important to understand
why young drivers (defined as typically under 25 years old) do,
on average, have higher premiums. A whole range of factors affect
the amount you pay for your car insurance policy, including: age,
vehicle, mileage, type of use, gender, occupation, postcode, claims
history and any driving convictions or penalty points. It is a
combination of these factors that determines the insurance risk,
and hence the premium a driver pays.
When it comes to young, inexperienced drivers, our
own data suggests they are twice as likely to make a claim, and
five times more likely to make a claim that involves an element
of injury than an older driver. Young drivers are 10 times more
likely to make a claim involving severe personal injury. These
statistics highlight why insurance for younger drivers tends to
be significantly more expensive. It is worth noting that this
is not based around the value of the vehicle that they drive,
but rather the amount of damage they can do with that vehicle
to themselves and other people.
One clear consequence of the higher premiums younger
people pay is the issue of "fronting". "Fronting"
is where the main driver of the vehicle is insured as the named
driver to reduce the cost of their insurance. This typically results
in younger drivers naming their parents as the policyholder and
themselves as a named driver. This method of reducing the cost
of a motor insurance policy is fraudulent. The consequences could
be grave, ranging from an additional premium being required, to
the voiding of a policy (and therefore non-payment of the claim), as
well as the policyholder being added to the financial industry's
fraud database (CIFAS).
Another potential consequence of high premiums for
young drivers is them opting to drive uninsured. The MIB estimates
that around one in five uninsured drivers are under the age of
There are, however, several ways for younger drivers
to reduce the cost of their motor insurance. Choosing a car that
is in a lower insurance group can reduce premiums by up to 30%
- even within the small car bracket. Young drivers who undertake
an advanced driving course such as Pass Plus are also eligible
for discounts with RBS Insurance and other insurers. We are continually
looking for ways to make the roads safer and are working with
the DSA to help to shape the future of driver training. We recognise
that Pass Plus would be a more effective differentiator of risk
if it contained a test at the end.
Direct Line was the first insurer to enable named
drivers to accrue their own No Clams Discount. Young drivers,
with no previous insurance history, can build up a discount that
can be used when they wish to take out an insurance policy of
RBS Insurance is committed to promoting road safety.
It has a long standing relationship with Brake, the road safety
charity and in 2009 released its "Ready to Drive" report
highlighting its recommendations to promote safer driving for
3. THE EXTENT
The changing cost of repairing a vehicle after an
accident is not a significant factor in recent increases in insurance
premiums. The increases here have been offset by the downward
frequency of road accidents, which Government statistics reveal
have fallen by three per cent in the last year. The most significant
factor is the huge rise in claims made for personal injury after
a road traffic accident (RTA). In fact, the Compensation Recovery
Unit has recorded an increase of 27.5% in the number of cases
they register for personal injuries after a RTA over the past
The Insurance Fraud Bureau states that the cost of
insurance fraud to honest policy holders is an additional £44
on every insurance policy. Our own research suggests one in ten
people who has claimed for personal injury after a RTA has either
lied about or exaggerated their injuries. The increased cost in
insurance premiums may potentially increase the number of people
who wish to commit fraud, to recoup the money they paid for their
There is a substantial correlation between when "no
win no fee" lawyers and claims management companies began
actively marketing their services and increases in fraudulent
claims for injury.
The actuarial profession recently highlighted within
its GIRO presentation the direct correlation between the increase
in the number of claims management companies and growth of personal
This is not to suggest, though, that lawyers and
claims management companies have encouraged fraud. However, by
commoditising the legal process and creating the perception that
everybody in an accident - regardless of the fundamental presence
of injury - is due compensation, they have provided the fuel for
the creation of a right to compensation as a "social norm".
For the increasingly significant minority who subscribe to the
view that "everybody is doing it anyway", the likelihood
of an attempt to commit fraud increases.
As Lord Young's recent report denoted, there is considerable
evidence of the disproportionate nature of damages in relation
to claimants' costs.
The Motor Insurance Bureau states that of the 34
million vehicles on UK roads, approximately 1.5 million are uninsured.
Uninsured drivers injure 23,000 people and kill 160 each year,
with a total cost to honest motorists of £500 million, paid
for through their insurance premiums. This is estimated to cost
an additional £33 on each and every law-abiding motorist's
RBS Insurance has expressed its concerns on the level
of fines within our response to the DFT's consultation paper on
uninsured drivers. An uninsured driver could be fined as little
as £50 under the current proposal which, when you compare
that to other fines such as £1,000 for not having a TV licence,
or £5000 for graffiti, is not a big enough deterrent.
The increase in motor insurance premiums also puts
pressure on the affordability of motor insurance for some people,
and may tempt them to drive uninsured.
RBS Insurance strongly believes that the Government
should implement, without delay, the full recommendations of Lord
Young's review on health and safety laws and compensation culture.
RBS Insurance draws particular attention to Lord
Young's recommendations to:
- ¾ introduce
a simplified claims procedure for personal injury claims similar
to that for road traffic accidents under £10,000 on a fixed
costs basis; and
- ¾ restrict
the operation of referral agencies and personal injury lawyers
and control the volume and type of advertising.
RBS Insurance strongly believes that the Government
should implement, without delay, the full recommendations of the
Lord Justice Jackson's Review of Civil Litigation Costs. RBS Insurance
draws particular attention to Lord Justice Jackson's recommendations
- ¾ abolish
the recoverability of both success fees and "After The Event"
(ATE) insurance premiums;
- ¾ and
assist claimants to meet the cost of the success fees for which
they would now be liable; an increase of 10 per cent in the level
of general damages for personal injury, defamation and other tort
claims; a regime of qualified one way costs shifting in specified
proceedings, including personal injury and defamation.
An additional policy consideration that RBS Insurance
would strongly urge the Government to look at is the use of and
access to CCTV in public places. Allowing insurers access to CCTV
at crash sites would speed up the process of compensating those
who were injured in the accident.