Written evidence from Lloyd's Market Association
(LMA) (CMI 06)
About the LMA: This
submission is provided by the Lloyd's Market Association (LMA),
which was formed in 2001, and represents all the businesses which
underwrite insurance at Lloyd's of London. Its members together
constitute one of the world's largest commercial insurance markets,
bringing many billions of pounds of foreign exchange to London
each year. Through the LMA, the interests of Lloyd's Underwriters
and Managing Agents are promoted wherever decisions are made that
affect the market.
1.1 Summary: We welcome the opportunity
to provide input into this important Inquiry. The significant
premium increases currently affecting UK motor insurance customers
are the result of a cyclical upswing in price after more than
a decade of losses. It is unfortunate for customers that long
overdue increases have arrived en masse, rather than via steady
annual uplifts over the past decade that would have better aided
budgeting.
1.2 Extensive market losses (circa 20% in 2009
alone) have been caused by a mix of underlying factors. These
include legitimate market effects such as low investment returns
and the high costs of providing care to badly injured claimants,
to dysfunctional effects, such as excessive/unnecessary credit
hire costs, fraud and disproportionate legal costs in personal
injury claims.
1.3 Whilst premiums have recently risen quickly,
there is no direct market failure for customers, who can still
choose a suitable product from a wide range of providers. In order
to reduce premiums, the underlying risks and the underlying costs
must be reduced.
1.4 There is a role for the Transport Select
Committee and the Government to play in tackling unnecessary or
excessive costs caused by dysfunctional market mechanisms.
1.5 Credit Hire: the current market mechanism
that supports the role of credit hire operators is badly flawed,
as customers are encouraged to incur unnecessary/inflated costs
without direct financial consequences, as the bill is usually
settled by someone else's insurer. Significant market reform,
supported by legislation where required, may be the only way to
remove this layer of inflated costs.
1.6 Legal costs: the Government should
implement the Jackson Recommendations[2]
(to reduce the costs of civil litigation) in full, and consider
implementing Lord Young's recommendations.[3]
The cost of civil litigation is disproportionately high, referral
fees paid by solicitors to acquire cases are excessive (and are
recovered from insurers via costs), and After The Event insurance
should be made unrecoverable.
1.7 Uninsured driving: there are unacceptably
high economic and social costs of this illegal activity. Police
enforcement using ANPR technology and the Motor Insurance Database,
coupled with their powers to seize vehicles driven uninsured,
have definitely made inroads into the problem. The Government
should now press ahead with implementing Compulsory Insurance
Enforcement, fully funded, in 2011 to improve prevention and tackle
persistent offenders.
1.8 Fraud: The Government should consider
two actions; better incentivising Police/CPS to take insurance
fraud seriously and prosecute more fraudsters, and consider
increasing court powers to strike out the entire claim of
(3rd party) fraudsters that have exaggerated their claim.
1.9 Excessive Risks presented by inexperienced
drivers: the current driver licensing regime does not adequately
manage the excessive risks presented by inexperienced drivers;
no minimum learning period, no restrictions on carriage of multiple
passengers or night-time driving. Research has shown that a tougher
licensing regime could lead to significant reductions in serious
accidents involving young people.
RESPONSES TO
SPECIFIC COMMITTEE
QUESTIONS
2. The reasons for, and consequences of, recent
increases in the cost of motor insurance
2.1 It has been widely reported in the press
that UK motor insurance premiums have significantly increased
over the last year. The AA Premium Index indicates that comprehensive
motor insurance premiums generally increased by up to 33% between
September 2009 and June 2010,[4]
although there remains a wide degree of difference in pricing
from one insurer to the next. There are a range of underlying
factors causing these premium increases, which are a response
to extensive losses experienced in the market over the last decade.
2.2 Some underlying factors are legitimate market
dynamics:
Low investment
returns.
High (and
super-inflationary) costs of providing care to seriously injured
claimants.
The heavily-suppressed
ability of insurers to increase premiums, caused by intense market
competition, facilitated by the advent of aggregator websites.
2.3 And some underlying factors are dysfunctional
market dynamics:
Inflated/unnecessary
costs caused by credit hire.
The high frictional
costs of settling personal injury claims.
Claims farming
leading to inflated claimant numbers.
The costs
of funding claims caused by uninsured drivers.
Insurance
fraud.
2.4 The cumulative effect of all the above
factors, against background of relatively flat premium levels
over the past decade, has caused the steady development of a "perfect
storm" for motor insurers in recent years, producing heavy
losses and driving a sharp cyclical upswing in price over the
past 9-12 months.
HEAVY LOSSES
2.5 The motor market has been running at a loss
for many years; the market has not made a net profit since 1994-95,
the only years of motor market-wide profit since the 1970s. Losses
have escalated in recent years, and the UK motor insurance market
collectively sustained a loss of circa 20% in 2009. At Lloyd's,
the largest motor syndicate (218 Equity Red Star), has recently
reported worst-case expected losses of up to 57% for 2008, and
up to 20% in 2009. KGM (syndicate 260) has reported expected losses
of up to 38% in 2008, and up to 26% in 2009. Gross Written Premium
remained virtually flat between 2002 and late 2009, despite sustained
losses.[5]
LEGITIMATE MARKET
DYNAMICS
2.6 General trading conditions for motor insurers
have been extremely challenging in recent years. Low investment
returns have reduced income on earned premium to minimal levels,
and intense market competition has severely squeezed profit margins.
Motor insurers operate in an intensely competitive industry, selling
a largely commoditised product. There are 50-60 insurers[6]
(and thousands of intermediaries), all competing for motor business
in the marketplace.
2.7 The emergence of price comparison websites
in recent years has further improved the market for customers,
permitting fast and easy comparison and purchase of cover. This
increased market efficiency has also created additional pressure
on margins for insurers. NB We consider the above issues to be
normal functions of a highly competitive marketplace, not public
policy issues.
DYSFUNCTIONAL MARKET
DYNAMICS
2.8 Credit Hire: Over the past 10-15 years,
credit hire firms have entered the motor claims market, offering
replacement vehicles (on credit) to motorists whose vehicles have
been damaged in an accident. In the event that the motorist successfully
brings a claim against the party at fault, he can recover the
costs of the car hire from the other party's insurer.
2.9 An element of this process is legitimate,
in that many people do need a replacement vehicle if theirs is
off the road. However, in reality this market is extremely dysfunctional,
and creates significantly inflated costs for insurers, which must
ultimately be recovered from customers via higher premiums.
2.10 The key issue is that the credit hire firms
are commercial firms, naturally seeking to maximise profits, but
the customer using their service is not the person paying the
bill. The bill is paid by the other party's insurer, who is not
part of the hire agreement, and so is not able to exert control
over the hire to apply normal market efficiencies.
2.11 This sustains a highly inefficient market
where credit hire firms routinely provide a replacement vehicle
for longer than is required by the customer (LMA member data indicates
that average credit hires are five days longer than insurer-arranged
hires).[7]
Also credit hire firms provide a replacement vehicle at a higher
cost than an insurer could; as much as 2.4 times higher on average.[8]
Also the involvement of credit hire firms in motor claims has
increased significantly in recent years; one LMA member reported
that cases involving a credit hire claim have increased by 69%
in 18 months (between January 2009 and September 2010).
2.12 In a proportion of cases involving credit
hire - perhaps 25% - credit hire firms are also involved in managing
vehicle repairs, where the same inefficiencies inflate repair
bills. These increased costs must ultimately be recovered via
premiums. Further, the costs have escalated rapidly; one LMA member
has reported that their average credit hire charge has increased
by 21% in 12 months.
2.13 Personal Injury Claims: It is the
function of motor insurance to assess and pay valid claims. Accordingly
a reasonable proportion of claims spend is a legitimate market
effect. However, a number of factors have illegitimately increased
insurers' claims spend, helping drive the current increase in
premiums. These factors include:
Excessive/disproportionate
referral fees - paid by solicitors to their business sources (including
insurers in some cases). These costs are thought to be in the
region of £300 to £700 per injury case; this is an estimate
as the system is not transparent and the fee is not disclosed.
After the
Event insurance - can add circa £400 to low-value personal
injury claims costs, and sometimes includes a significant commission
for the claimant solicitor.[9]
High costs
- legal costs to fund no-win no-fee agreements, including
recoverable After The Event insurance costs and success fees.
The cumulative effect of these fees currently adds circa £2,500
to the cost of an injury claim.[10]
2.14 Research by one LMA member indicated that
legal fees are so disproportionately high that the average legal
fees on injury claims, over the last 18 months, have been higher
than average general damages paid to claimants.[11]
In their experience this equated to over £1.08 in legal costs
for every £1 paid to claimants.
2.15 The Jackson Review has strongly recommended
making a series of changes to the civil litigation system to reduce
costs - we fully support these proposals and the Government should
press on with implementation. The MoJ is due to consult on this
issue, and we look forward to responding to this document. Lord
Young of Graffham has also recently made some recommendations
to improve the UK liability regime, and these recommendations
also deserve serious consideration - particularly if the vested
interests of middlemen are to be overcome.
2.16 NB The current no-win no-fee funding mechanism
saves the Government money as it replaced legal aid. One of the
consequences of replacing state-funded legal aid has been to make
the process highly profitable for claimant solicitors and their
agents to recruit injury claimants and pursue a claim on their
behalf.
2.17 Claims Farming: An additional factor
driving premium increases is the increase in claims frequency
that motor insurers have recently experienced. An LMA member has
reported an unprecedented increase of 68% in the number of paid
claims in 12 months between Q1 in 2009 vs Q1 in 2010. Whilst this
is not necessarily dysfunctional per se, such unprecedented
increases are highly unusual in such a mature market. Most motor
insurers have experienced a significant increase in claimants
per claim in recent years, most likely as a result of intensive
claims farming, encouraging passengers (for example) to bring
a claim where they would not have in the past. This is against
a background of falling accident levels.[12]
Whilst genuine claimants are fully entitled to damages, the lucrative
rewards available to personal injury lawyers, and their agents,
would appear to be driving claims farming at unprecedented levels,
all of which must ultimately be recovered via premiums.
2.18 Uninsured drivers: The costs and
risks caused by uninsured drivers are unacceptably high, creating
a significant societal problem. Lloyd's syndicates currently contribute
around £20 million a year to the levy collected by the Motor
Insurers' Bureau, which is used to compensate the victims of uninsured
or untraced motorists. The total market levy collected in 2009
was over £400 million, compared with £274 million in
2002, an increase of nearly 70% in eight years. This expense must
be ultimately recovered from the premiums of honest motorists.
As well as the economic effects, uninsured drivers are disproportionately
high-risk; they are far more likely to drink-drive, cause accidents
and drive unsafe vehicles.
2.19 However, despite commendably high annual
levels of vehicle seizures by Police, a hardcore of uninsured
drivers remain. To take make further inroads, Compulsory Insurance
Enforcement is to be introduced in 2011, which will involve enforcement
from the Motor Insurance Database record; the Government has agreed
to fully fund and implement this urgently needed legislation in
2011, and this timetable and investment must be adhered to if
the costs and risks are to be reduced further. Particularly in
the context of the downturn in the economy and increased unemployment,
more motorists may decide to take the risk of breaking the law
and drive uninsured. Education of motorists and heightened enforcement
are crucial to managing these risks.
2.20 Fraud: Insurance fraud is on the
increase in several areas: misleading insurers when applying for
insurance, fraudulent behaviour when making a claim, and organised
fraud. His Honour Judge Hawkesworth QC recently stated that "Unhappily,
fraudulent claims are now legion. They occupy the court
time of District Judges and Circuit Judges in West Yorkshire literally
week in and week out
Just about every variant of a fraudulent
claim comes before the court. The cost to the insurance industry
and to other honest policy holders must be very substantial. In
addition the cost in court time in trying such cases is very high".[13]
2.21 The costs of fraud are very high indeed.
In respect of organised fraud alone, the Insurance Fraud Bureau
estimates that motor insurers are exposed to £350 million
of organised fraud per year, adding around £44 to the cost
of policies. An LMA member reported that the number of fraudulent
claims investigated has increased by 54% in 2009 compared with
2008, and the average value of a motor insurance fraud claim is
now over £21,000.
2.22 In terms of Government action to help reduce
fraud, we suggest two areas for consideration:
(a) Increase the deterrent by stepping up criminal
prosecutions for fraud; all too often insurers detect fraud and
refer the case to the Police, who often do not progress the case,
and they consider insurance fraud to be a low-priority issue.
A change in Home Office priorities for Police, better incentivising
fraud prosecutions could be prudent.
(b) Reform the law to ensure that both first
and third-party insurance fraudsters who inflate their claim risk
losing their entire award, where fraud is proven (currently this
is the case for first-party claimants only).
CONSEQUENCES OF
PRICE INCREASES
2.23 In most cases, given (third party) motor
insurance is compulsory, the main consequence of high premiums
is increased economic burden on motorists, leading to reduced
levels of disposable income. However, we should also recognise
that higher premiums could also create a potential increase in
uninsured driving, and a potential increase in fraud.
3. The impact on young people of the high
costs of motor insurance
3.1 Young people, and all inexperienced drivers,
are likely to experience a particularly high economic burden owing
to the current increases in insurance premiums. Higher risk drivers
pay higher premiums, and therefore their pockets suffer more,
in real terms, when premiums rise. They may also face an increased
temptation to drive uninsured, or mislead their insurer when applying
for cover; both of which are criminal offences.
3.2 That said, there are two powerful public
benefits of the current risk-based pricing model used in the UK
insurance market:
Insureds contribute
to the premium pool relative to the risk they present,
a fair and proportionate system that ensures motorists enjoy the
benefit of lower premiums over time, as their risk reduces with
experience.
Risk-pricing
creates a powerful economic incentive to reduce risks; the lower
the risk you present, the lower your premium. An alternative pricing
model (such as using a flat-rate for all drivers, based purely
on vehicle risk) would remove individuals' incentive to reduce
risks, leading to an increase in accident frequency, and higher
costs for all.
3.3 In order to reduce premiums, the underlying
risks must be reduced. The ABI published detailed research in
2005,[14]
which established that:
Young drivers
were 10 times more likely to be killed or seriously injured than
drivers in their 40s.
Serious accidents
involving younger drivers are increasing against a general trend
of a reduction in casualty rates.
A higher proportion
of accidents involving young drivers take place at night.
Young drivers
are much more likely to have an accident as a result of speeding,
particularly on a bend, driving competitively with other cars,
drink/driving or allowing passengers to distract them.
Young drivers
are much more likely to be carrying passengers when they have
an accident.
3.4 Following this research, the insurance industry
suggested a series of changes in driver licensing policy in order
to reduce risks, reduce premiums and improve the safety of young
road users. These included:
A minimum
one-year learning period for all learner drivers to increase experience,
and reduce the volume of drivers not accompanied by an instructor
or supervisor.
Passenger
restrictions including limiting carriage of passengers, and limiting
night-time driving. Multiple passengers and night-time driving
have been shown to significantly increase young drivers' accident
risk.
Education
to change attitudes to driving. Whilst we should be realistic
as to what can be achieved, there is significant research indicating
that attitude to driving is an important safety factor, independent
of driving skill.
3.5 Whilst a consequence of these proposals would
be to reduce personal mobility, serious consideration should be
given to introducing the above initiatives if the risks, and the
costs driven by these risks, are to be reduced.
4. 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
4.1 The above are key factors affecting costs.
Credit hire is an additional relevant factor currently influencing
motor premiums upwards.
4.2 Regarding the prevalence of road accidents,
there is an ongoing debate regarding the proposal to change Daylight
Saving time, adding an hour to GMT in order to make school journeys
safer in winter months (the Bill also discusses other wider benefits).
The Daylight Saving Bill 2010-11 is due for its second
reading on 3 December, and the Transport Select Cmt may wish to
consider supporting the Bill.
5. 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.
There are several important public policy implications
of the issues outlined above. To summarise, we recommend that
the Committee and the Government should:
Note that
market reform may be required to remove excessive costs for insurers
and consumers caused by credit hire.
Implement
Lord Jackson's proposals in full, to reduce the costs of civil
litigation.
Consider implementing
Lord Young's proposals.
Ensure that
Continuous Insurance Enforcement is implemented as planned in
2011.
Fully consider
proposals to reduce the risks presented by inexperienced drivers.
Incentivise
the Police to assist in prosecuting more insurance fraudsters.
Improve Court
powers to tackle insurance fraudsters.
Consider supporting
the Daylight Savings Bill.
November 2010
2 Lord Justice Jackson's Review
of Civil Litigation Costs (2010) Back
3
Lord Young of Graffham's Common
Sense, Common Safety (2010) Back
4
http://www.theaa.com/services/insuranceandfinance/insuranceindex/index.html
Back
5
One LMA member reported their average private car premium, between
2002 and 2008, had reduced by 1.1% Back
6
LMA estimate Back
7
LMA member data; 19.5 days vs. 14.5 days Back
8
LMA member data; average credit hire charge of £1100 compared
with equivalent insurer costs of £450 in 2009-10. Back
9
Case studies available. Back
10
LMA member data; average legal costs in injury claims between
January 2009 and September 2010. Back
11 LMA
member data; between January 2009 and September 2010 average legal
fees were £2,375 compared with average general damages of
£2,165. Back
12
Department for Transport statistics indicate that reported casualties
reduced by 4% between 2008 and 2009. The 2009 figure for road
users killed or seriously injured is 44% lower than the 1994-1998
average. Back
13
In Hussein & Others v Khan & Others [2006]. Back
14
Young Drivers: Road Safety and the Cost of Motoring. Back
|