Written evidence from Enterprise Rent-A-Car
This paper has been prepared by Enterprise Rent-A-Car
as a submission to the Transport Select Committee's inquiry into
the cost of motor insurance. It illustrates the extent to which
car insurance premiums have risen over the past twelve months,
sets out some of the reasons for this increase, and offers a number
of suggestions for further investigation by the committee.
Enterprise Rent-A-Car was founded in 1957 and is
an industry leading, multi-national company with approximately
one million vehicles in its global rental fleet and an annual
turnover of more than $12bn. In the UK its current rental fleet
is approximately 48,000, which makes it the largest car rental
company as well as the biggest purchaser of vehicles in the country.
Enterprise employs 3,400 people in the UK across 340 offices and
branches - more sites than any other rental company.
Enterprise began trading with the overriding business
philosophy that "you take care of your customers and employees
first, and profits will follow". Enterprise starts from the
point where its relationship with clients is a partnership and
the company will support the client with change management as
well as capacity issues, whilst delivering outstanding customer
service for our corporate and retail customers. Insurance replacement
vehicles account for some 30-40% of our rentals. Our approach
has been to work with insurers to provide a cost effective and
customer focused service.
3. THE RISING
The cost of motor insurance has risen by an average
of 40% over the last year. These figures indicate that the cost
of car insurance has increased at its fastest rate since the AA
started analysing the market. The price of the average comprehensive
motor insurance policy has risen from £473 in the second
quarter of 2009 to £650. The 17-20 year old male group has
seen the biggest increase, with the cost of a comprehensive policy
increasing by £284 to £2,879, while women in the same
age range have seen their premiums go up by £147 to £1,490.
Although some observers have speculated that the price rises may
be starting to run out of steam, it is clear that this is part
of a longer-term upward trend, as premiums rose by 10% in 2007
and 8% in 2008.
There are a number of explanations which have been
offered for this drastic increase in the cost of insurance. Insurers
claim that they are currently paying out more than they are taking
in and the price rise over the past year is simply a correction
in terms of premium costs. In March 2010 a survey by EMB, one
of the world's largest specialist non-life insurance and reinsurance
actuarial consultancies, indicated that, for every £1 the
retail motor industry receives in premiums, it has to pay out
£1.20 in costs and claims. This is a knock-on effect from
the rise in non-transparent and often poorly managed third party
organisations, such as some accident management or Credit Hire
Organisations (CHOs) who increasingly control the claims process
(including repair costs and length) and in some cases, appoint
third party specialists such as no-win, no-fee lawyers to maximize
the cost of the claim via personal injury.
Industry trends suggest that where accident management
and certain CHOs are used the cost of claims tends to increase.
Moreover, the accident management industry is becoming involved
in an ever increasing number of cases. Between 2002 and 2007 the
proportion of third party accident claims that involved accident
management companies or Credit Hire Organisations increased from
7% to 20%.1
4. THE ROLE
CHOs work by providing access to repair services
and replacement rental vehicles and managing or sourcing other
justice provision services such as bodily injury for not-at-fault
drivers following an accident. They reclaim their outlay by charging
the at-fault driver's insurance provider a higher cost for the
services incurred (repair, replacement vehicle). Where they do
not manage BI claims themselves, typically these will be farmed
to lawyers for a referral fee of often up to £1000. It is
obviously in the interest of the lawyer to then convert that claim
and recover compensation for the driver and costs. If the CHO
fails to recover the costs from the at-fault driver's insurance
company, they may then look to charge the not-at-fault driver.
This has led to a number of high-profile court cases after the
at-fault driver's insurance company has refused to foot the bill
on the grounds that they have been excessive.
The services offered by the Credit Hire Operators
are legal entitlements of the non-fault driver, so by virtue,
are inherently good. However, the industry lacks a degree of regulation
to control some of the processes and practices that certain accident
management and CHOs adopt. Typically, these practices can be extremely
inefficient and through manipulation of repairs (sometimes through
bodyshop ownership or "agreements") can lead to vastly
elongated repair times and thus replacement car hire periods.
This has a knock on effect of pushing up the cost of insurance
premiums. A large volume buyer is usually able to purchase rental
cars on a per day basis at up to 50% less than through a CHO.
The average hire time is also higher when a claim is being handled
by a CHO. The average rental is around 25 days through a CHO,
but where an insurance company has direct control of the claims
process and is organising the rental directly, this can fall to
13 to 14 days.2 Certain practices came to light earlier
this year when a small spate of whistle-blowing uncovered some
of the specific practices adopted by certain companies to lengthen
repair times and increase claims costs.
Key to the growth of the accident management industry
has been the "race to the client". The accident management
industry captures claims by paying referral fees to insurance
companies, garages or other sources, who recommend their service
to not-at-fault drivers. Often referral sources will refer victims
of a road collision onto an accident management company before
their insurance provider is aware there has been an accident.
CHOs do provide a useful service, meeting the changing
needs of the consumer and their need for personal mobility. As
such Enterprise has made use of credit hire as part of our service
to customers, but this has been largely at the request of insurance
providers with transparency over prices and the length of hire
and professionalism at the heart of our approach. In cases where
the claims involving credit hire are not effectively managed,
then the cost of claims can spiral out of control and thus play
a big role in pushing up insurance premiums.
5. LEGAL LIABILITY
As mentioned, in some cases CHOs also refer their
clients to personal injury lawyers, for which they receive referral
fees. This helps push up the cost of claims settlements. Association
of British Insurers figures suggest that the average cost per
motor bodily injury claim in 2008 was £3,512an increase
in 16% over the previous year. Combine this with a 13.3% increase
in incidents involving personal injury claims between 2007 and
2009 and the real cost becomes more apparent. More recent analysis
by the ABI of 50,000 low value road accident personal injury claims
suggests a £40 increase in premiums per average policy as
a result of legal fees and costs.
This increase in personal injury claims has been
a major factor in driving up motor insurance premiums. The proliferation
of "no win, no fee" solicitors as part of the accident
management portfolio of services has increased compensation claims
despite the fact that the number of road accidents has remained
broadly the same in recent years. Some companies guarantee a 40%
conversation (win rate) and will pay up to £1,000 for a personal
injury referral. By nature, this encourages an aggressive sell
to the non-fault claimant to help meet the 40% target. Lord Young's
recent review into health and safety legislation found that there
is a growing burden on businesses by insurance programmes that
entail expensive premiums, and that this has been mainly driven
by frivolous claims and the growth in conditional fee agreements
over the last few years.
6. THE ROLE
The growth of the accident management industry is
in some way a response to a need in the market for suitable services
targeted at non-fault drivers who have been involved in a crash.
Historically, many insurance companies did not offer their customers
an effective repair and replacement car service or relevant access
to justice for legitimate claims. CHOs spotted this gap in the
market and saw an opportunity to give their clients what they
were entitled to after an accident, taking control of the claims
away from the insurer. For non-fault claims, the insurers saw
this service as valuable as they were able to pass on responsibility
for the claim to a third party and generate revenue from the referral.
However, at that time, no-one could have foretold the impact this
would have on at-fault claims costs.
7. THEFT, FRAUD
The most common and costly form of insurance claims
fraud is "opportunistic retail fraud". This is where
individuals exaggerate or inflate genuine claims to increase the
value of a payout, and is often factored into loss ratio calculations.
However, there is evidence to suggest that the past few years
have seen a big rise in organised scams, where criminal gangs
work to systematically defraud insurers. There are frequently
reported examples of "crash for cash" cases where accidents
are staged, usually at roundabouts, by drivers suddenly braking,
causing the car behind to crash into them. In October 2009, a
man was sentenced to four and a half years in prison for deliberately
causing at least 93 car crashes in three years, costing insurers
around £17,000 on each occasion.3 Figures from
the Insurance Fraud Bureau estimate that around 30,000 accidents
were staged last year, costing the industry £350m and adding
£44 to the premiums of every driver in the country.4
Another phenomenon which has emerged in recent years
has been that of organised criminal gangs, particularly with connections
to Eastern Europe, stealing cars in the UK as part of the lucrative
illegal trade in luxury vehicles. A recent report from Europol
noted that "the incidence of organised international vehicle
trafficking is on the increase", and that "no other
type of criminal activity is as lucrative for such minimal risk".
A high value car can net around £15,000 on the black market,
with half the cars stolen in the EU trafficked to neighbouring
countries, generating around £6.75 billion in annual revenues.
While Ireland and Holland have been the main focus
of such activity in recent years, there has been a number of reports,
particularly in Yorkshire and Essex. In July 2010, five Lithuanians
were jailed for their part in a £750,000 stolen car smuggling
In addition to this, insurance premiums are being
pushed up by the growing number of uninsured drivers. A 2010 study
by Kwik-Fit showed that there could be some 2.6 million people
who drive without an MOT.6 Around 1.6 million people
are believed to be driving without insurance. Uninsured drivers
injure 23,000 people and kill 160 each year with a total cost
to honest motorists of some £500m through a 'surcharge' of
a further £30 per policy.7
Uninsured drivers are far more likely to be involved
in road traffic accidents, fail to follow traffic signs, or cause
injury or damage to other people's vehicles or property. The increased
cost of motor insurance creates a vicious circle, as higher prices
temp more drivers to feel they can get away without insurance,
which pushes premiums up even higher.
Although there has been some speculation that the
worst of the insurance price increases may now be behind us, there
are a number of measures on the horizon which mean that cost pressures
on motorists are likely to remain for the foreseeable future.
The forthcoming increase in Insurance Premium Tax from 5% to 6%
in January 2011 will mean that drivers will be paying £18
per year on a £300 policy. With the increase in VAT from
17.5% to 20%, and a recent 1p increase in fuel duty, the IPT hike
will hit drivers at a particularly difficult time in the economic
cycle. Enterprise believes that the recent price increases are
part of a systemic imbalance in the insurance industry which has
been driven by the "race to the client" challenge from
CHOs and fuelled by the perceived "compensation culture"
highlighted in the Young report.
In order to meet the challenge of rising insurance
premiums and ensure that car travel remains an affordable and
viable means of transport in these economically challenging times,
Enterprise recommends that the Transport Select Committee investigate
the following areas:-
(a) Mandatory reporting of any accident to
the driver's own insurance company
One of the reasons costs get out of control and disputes
arise during insurance claims is that CHOs capture and control
the claims process and associated costs. Members of the Transport
Select Committee should consider the benefits of adopting a more
robust regulatory approach to case management through an amendment
to the Road Traffic Act to require mandatory reporting of accidents
to their insurance providers, even in cases where the at-fault
driver has admitted liability.
(b) Review the role of referral fees in the
accident management industry
The payment of referral fees by the accident management
industry has encouraged some of the behavioural challenges we
see today. Referral fees are driven by competitive forces. As
the CHOs or other participating organisations try to 'out-compete'
on referral fees paid, the cost of these increases needs to be
bourn in the claims costs charged to the at fault insurer. However,
crash victims are often not in a position to make an informed
choice about what service is right for them. All too often, CHOs
or other accident management companies are sold policy-holder
details through a range of referral sources. This can be interpreted
by the policy-holders as a belief that the organisation is working
for and on behalf of the insurance company when, in actual fact,
they are ring-fencing the non-fault claimant and looking to maximise
the value of the claim.
In addition to a requirement that all accidents should
be reported to a driver's insurance provider, the committee should
examine the practice of referral fees paid to breakdown companies,
scrap yards, emergency services or other referral sources by the
accident management industry. In particular, the payment of referral
fees for personal injury opportunities has helped to fuel a circle
of litigation that has pushed up insurance costs. Referral fees
in themselves aren't a bad thing but can encourage bad behavior,
and the process needs to be more customer-centric. Enterprise
operates in this market, but our approach is designed to challenge
behavior and ensure that claims are managed in a transparent manner.
We believe the Transport Select Committee should consider the
benefits of a cap on referral fees as a means of keeping claims
under control and reducing their impact on insurance premiums,
as well as ensuring that sellers look at service as well as revenue.
(c) Limits on the amount of compensation that
can be awarded under "no win, no fee" arrangements
The Young Review noted that the proliferation of
"no win, no fee" services has given rise to the perception
that there is no financial risk to starting litigation, and indeed,
some individuals are given financial enticements to make claims
by CHOs, who are in turn paid referral fees by solicitors. These
costs must all be met by insurance companies, and passed onto
drivers through higher premiums. Enterprise suggests that the
Transport Select Committee considers increasing the upper threshold
of £10,000 for personal injury claims for road traffic accidents
that can be settled on a fixed cost basis.
Of particular concern are guarantees by some solicitors
that they can convert 40% of personal injury referrals into compensation
payments. Several years ago this figure was around 10%, demonstrating
the extent to which the compensation culture has contributed to
the financial burden borne by the insurance providers.
The Jackson Review proposed a number of measures
which would place restrictions on the amount of compensation that
could be awarded under "no win, no fee" cases. Any reform
of legal liability law should give claimants a financial interest
in the level of costs being incurred under their name, while still
allowing claimant solicitors to make a profit.
(d) Action against uninsured drivers
A study by the Motor Insurance Bureau suggests that
10% of drivers in the 18-34 age range do not know that car insurance
is a legal requirement, and around 900,000 drivers under the age
of 30 are currently driving without any insurance. The committee
should investigate ways in which drivers can be made more aware
of their obligations and responsibility to themselves and other
drivers. While the Road Safety Act 2006 makes provision for harsher
sentences for uninsured drivers who injure or kill others, the
committee should consider whether the maximum fine of £5,000
and six to eight penalty points should be increased to reflect
the seriousness of the offence and reduce the temptation for drivers
to go without motor insurance.
(e) Tougher action against "crash for
The committee should look at ways to clamp down on
the growing number of insurance fraud and "crash for cash"
schemes. The Fraud Act 2006 defines insurance fraud as a crime
punishable by up to ten years in prison, a fine, or both. There
are also powers to prosecute the perpetrators of such cases through
laws against reckless and dangerous driving. The committee should
consider whether the police are aware of the full range of powers
available to them to tackle crash for cash schemes, and what additional
measures and resources might be required to reduce this fraudulent
1 Invasion of the
client snatchers, Motor Report, 10 April
2 Unite and conquer,
Post Magazine, 29 May 2008.
3 "Crash for
cash" scam man jailed, BBC News,
21 October 2009
4 Crash scam figures
at record high, insurers warn, BBC News,
21 August 2010.
5 Lithuanian gang
sentenced for stolen car ring, Waltham
Forest News, 3 July 2010
No MOT, No Matter?,
Kwik-Fit, 30 September 2010
7 Motor Insurance