The cost of motor insurance - Transport Committee Contents

Written evidence from Aviva (CMI 21)


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:

  1. 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.
  2. ¾  The introduction of "No Win No Fee" arrangements and associated changes has encouraged claims and added additional costs.
  3. ¾  Increased use of high referral fees by solicitors.
  4. ¾  Increased fraud.

Two other significant factors have also contributed:

  1. 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.
  2. 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:

  1. ¾  Implement the recommendations of the Jackson and Young reviews to address the impact of the compensation culture and "No Win No Fee" agreements.
  2. ¾  Significantly toughen driver training, including overhauling Pass Plus.
  3. 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.


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.


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:

  1. (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.
  2. (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.
  3. (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.
  4. (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:

  1. (a)  Jackson recommends removing the recoverability of ATE and Success fees - this would be of significant benefit in reducing cost.
  2. (b)  Jackson recommends the banning (or restricting) of referral fees.
  3. (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.
  4. (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.
  5. (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.
  6. (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.


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.


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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