Written evidence from Aviva (CMI 21)
SUMMARY
Insurance costs reflect claims costs. Although the
frequency of collisions has remained broadly flat over the last
decade, there have been four key drivers of increasing cost:
- ¾ Increased
number of bodily injury claims and increased number of claims
per incident. Of the money insurers pay out in claims, 40% is
for bodily injury - half of which is accounted for by legal fees.
- ¾ The
introduction of "No Win No Fee" arrangements and associated
changes has encouraged claims and added additional costs.
- ¾ Increased
use of high referral fees by solicitors.
- ¾ Increased
fraud.
Two other significant factors have also contributed:
- ¾ Young
male drivers are a significant component of increased costs -
costs of injury claims for a young male driver are up to four
times higher those for a 40 year old driver. Increased premiums
for young drivers reflect this risk.
- ¾ One
in six drivers misrepresent their conviction history when purchasing
insurance, which distorts underwriters' ability to accurately
assess their risk and likelihood of making a claim.
To address these developments we believe that the
Government should:
- ¾ Implement
the recommendations of the Jackson and Young reviews to address
the impact of the compensation culture and "No Win No Fee"
agreements.
- ¾ Significantly
toughen driver training, including overhauling Pass Plus.
- ¾ Accelerate
moves to make DVLA data available to insurers and communicating
and enforcing rules to ensure that uninsured vehicle must have
a valid Statutory Off-Road Notification.
These issues are explored in more detail below.
ABOUT AVIVA
Aviva is pleased to respond to this consultation.
Aviva provides peace of mind for more than 50 million people across
the world, protecting their families and possessions and looking
after more than £380 billion to help our customers save for
the future.
More than 19 million customers rely on us in the
UK - one in three of the population - and we insure one in 10
private cars. We have one of the largest insurance databases enabling
us to use the data from millions of customers and thousands of
claims to predict the likelihood of a future claim for any given
customer and therefore give customers a fair price in relation
to the risk they represent.
THE REASONS
FOR AND
CONSEQUENCES OF
RECENT INCREASES
IN THE
COST OF
MOTOR INSURANCE
1.1 There are a large number of providers operating
in the personal motor insurance market and it remains very competitive.
1.2 The frequency of collisions has remained
broadly unchanged over the past decade but the cost of insurance
has risen for four key reasons:
- (a) Increased bodily injury claims:
The industry is seeing circa 10-12% p.a. more bodily injury claims
and also more claimants per claim - circa 3% increase p.a. Of
the money insurers pay out in claims, 40% is for bodily injury
- half of which is accounted for by legal fees.
- (b) Introduction of No Win No Fee agreements
and associated changes have encouraged claims and added
costs. Introduced in the late 1990's, these have taken the financial
risk away from claimants. These agreements backed by legal expenses
insurance policies have encouraged people to claim where previously
they may not have, thus increasing costs. In addition the ability
to recover After the Event Insurance (ATE) Premiums and Success
Fees became possible against a compensating defendant in 2000
and are now common on circa 60% of all BI claims which adds significant
additional cost to defendants.
- (c) Increased use of high referral fees
by solicitors: The number of claimants continues to rise largely
as a result of Claims Management Companies advertising and seeking
claimants. Referral fees to solicitors became legal in 2004 and
form part of a solicitor's marketing costs. These have risen from
approx £200 in 2004 to circa £800 now (Legal Services
Board). The solicitor paying the referral builds this cost into
the process and it is now estimated that some solicitors' marketing
costs are between 23% and 40% of base costs.
- (d) Fraud: The increase in
compensation has led to "cash for crash" scams. In 2009
the Insurance Fraud Bureau estimated there were over 30,000 fraudulent
"accidents." The cost of investigating such claims and
defending them adds significant costs to insurers.
1.3 In addition, in 2009 the ABI and Actuarial
Research Consultants EMB estimated that the industry as a whole
paid out £1.23 in claims for every £1 received, a situation
that cannot be sustained.
1.4 The situation could be mitigated by regulation.
In 2008 Lord Justice Jackson was asked by the Master of the Rolls
to undertake a full review of civil litigation costs and make
recommendations to increase access to justice at a more "proportionate
cost". In 2009 then Leader of the Opposition David Cameron
asked Lord Young to look at Health & Safety law and comment
generally on "compensation culture" which has grown
(be it real or perceived) in the last 5-10 years. Both Jackson
and Young have reported in 2010 and both reports offer some proposals
which Aviva believes will act as to reduce peripheral costs:
- (a) Jackson recommends removing the recoverability
of ATE and Success fees - this would be of significant benefit
in reducing cost.
- (b) Jackson recommends the banning (or restricting)
of referral fees.
- (c) Jackson suggests a wider Fixed Costs
regime - currently there is a fixed costs regime in Pre Litigated
Motor claims which do not exceed £10K. Jackson suggests widening
this to all claims under £25K.
- (d) Conditional Fee Agreements - Jackson
suggests alternatives to these be investigated eg Damages Based
Fee Agreements which give the claimant a degree of financial involvement
in the litigation process and encourage claimants to find a solicitor
offering the most competitive agreement.
- (e) Lord Young suggests widening the Ministry
of Justice (MOJ) claims process which involves a low cost and
fixed fee model to motor claims below £25K. The process currently
applies to claims below £10K.
- (f) Lord Young wishes to restrict the operation
of referral agencies and the volume and type of advertising.
Aviva is of the view that all of these noted proposals
would reduce the peripheral costs of lower value claims while
continuing to ensure injured parties continue to receive a reasonable
level of compensation. Aviva is working with the ABI to engage
with all parties on the various resulting consultations.
1.5 At the same time, insurers have experienced
an unprecedented increase in the cost and frequency of larger
personal injury claims, not just for new claims but for outstanding
claims from previous years. This matter has been made even more
difficult in the current economic climate by more claimants opting
for Periodical Payment Orders rather than lump sum settlements.
This involves paying sums to injured claimants over a period of
time (for the rest of their lives), and increasingly the period
and sums involved have escalated. This is because the life expectancy
of severely injured people has risen, associated care needs increased,
and the annual sums payable are linked to indices which inflate
well above the RPI, (eg ASHE 6115 - a statistical estimate of
the earnings of carers in the UK). This has added to pressure
on previous year reserves meaning that some companies have had
to strengthen them. In addition, poor current investment returns
have led to significant premium rises in 2010.
1.6 However, due to prudent early action Aviva
has been able keep motor insurance premium increases below the
market average.
1.7 We are concerned, however, that in the current
economic environment, with significant cuts to local authority
and policing budgets, and an anticipated reduction in road safety
initiatives the long term downward trend in the numbers killed
and seriously injured in motoring accidents could be reversed.
THE IMPACT
ON YOUNG
PEOPLE OF
THE HIGH
COST OF
MOTOR INSURANCE
2.1 Aviva data shows that the cost of injury
claims for a 17 year old driver is twice that of a 40 year old
driver, and for young males, up to four times higher. Increased
premiums for young drivers reflect this risk.
2.2 Aviva data shows that many serious injuries
which result in claims in excess of £250K are caused by young
males, with the cost being composed mainly of injuries to passengers
in the young driver's vehicle. This explains the widening differential
between the genders and makes the pending European Court decision
on gender discrimination of great concern to us. Equalising premiums
would increase rates for young females unfairly with little impact
on male rates.
2.3 In the case of young drivers Aviva would
like to see a complete revamp of driver training. In our view
there should be a minimum learning period and training should
include a minimum number of hours of night driving and if possible
poor weather driving and dual carriageway experience. Classroom
peer group sessions should be included to cover road safety, coping
with peer pressure and wider issues of ownership including the
potential consequences of poor driving.
2.4 Aviva also believes that parents or guardians
should be involved in the learning process and Aviva is the first
insurer to produce a parent guide, soon to be available in commercial
learning software.
2.5 We also believe that the Pass Plus initiative
should be enhanced by including motorway driving, night driving,
and poor weather training in the programme, as well as having
to take a test to show improved competence.
2.6 As an insurer, Aviva knows that a significant
proportion of accidents involving young drivers take place after
11pm; steps to restrict driving after this time would reduce injuries
with a consequent impact on premium costs.
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
3.1 Aviva would welcome faster progress in the
release of DVLA data to insurers, which the industry has agreed
to fund.
3.2 One in six drivers misrepresent their conviction
history when purchasing insurance, which distorts Underwriters'
ability to accurately assess their risk and likelihood of making
a claim (data shows a clear correlation between motorists with
previous convictions and likelihood to make claims in the future).
Aviva wishes to ensure that honest customers do not bear the costs
of dishonest drivers, and by sharing the DVLA data on convictions,
insurers will be able to more accurately price insurance for each
customer based on the true records of driving history. We welcome
the progress now being made to provide insurers with access to
driver records.
3.3 From 2011 it will be illegal to own an uninsured
vehicle unless a SORN declaration has been signed. Aviva is anxious
for the relevant legislation to be passed, then communicated and
enforced in order for the number of uninsured vehicles involved
in accidents to be reduced.
November 2010
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