Written evidence from the Association
of British Insurers (ABI) (CMI 13)
1.1 The UK insurance industry is the third largest
in the world and the largest in Europe. It is a vital part of
the UK economy, managing investments amounting to 24% of the UK's
total net worth and contributing the fourth highest corporation
tax of any sector. Employing over 275,000 people in the UK alone,
the insurance industry is also one of this country's major exporters,
with a fifth of its net premium income coming from overseas business.
2. EXECUTIVE SUMMARY
2.1 The ABI has, for some time, been actively
campaigning for several key issues to be addressed in order to
help stem the cost increases being faced by motor insurers. We
believe if these issues are addressed, there will be a substantial
improvement in the operating environment for motor insurers which
will deliver real benefits for customers.
How motor insurance costs could be better controlled
The implementation,
as a package and in full, of the recommendations of the Jackson
Review on civil litigation costs designed to bring costs under
control and make them fairer.[15]
The implementation
of the recommendations of Lord Young's review of health and safety
and the compensation culture[16]
and extending the simplified claims procedure for personal injury
claims for road traffic accidents on a fixed costs basis from
claims of up to £10,000 to claims of up to £25,000.
Introducing
measures to reduce the number of accidents involving young drivers
by extending learning periods, limiting the number of passengers
young drivers can carry and improving driver education.
Further reducing
the incidence of uninsured driving by implementing regulations
to ensure Continuous Insurance Enforcement which will make it
an offence to keep a vehicle without valid insurance.
Facilitating
greater data sharing between the industry and the public sector
in order to tackle fraud.
Implementing
the proposals in the ABI publication Tackling Whiplash, Prevention,
Care, Compensation to improve driver awareness of the risk
for example by adjusting their car head restraints properly and
learning to keep a safe distance.
Continuing
to allow insurers to price risk accurately by using both gender
and age as legitimate factors on which to base premiums.
BACKGROUND
2.2 The latest figures from the AA Premium Index
show that motor insurance premiums are increasing following a
long period when premiums were relatively stable. This increase
is the inevitable result of the increasing claims costs facing
insurers. In particular, claims arising from injuries to people
on our roads are becoming more and more expensive and insurers
are receiving more of these types of claims.
2.3 EMB, the actuarial consultancy, recently
reported that "Bodily injury (BI) claims in particular
have been increasing steadily for some time. EMB has seen clear
indications that even though the number of accidents is decreasing,
the number of BI claims continues to increase, accompanied by
a significant rise in the average size of such claims, in part
driven by a strong increase in the number of claimants per claim.
Based on data representing 85% of the FSA regulated market, the
Institute of Actuaries Third Party Working Party has estimated
that bodily injury claims frequency has recently been increasing
at 9% per annum and average bodily injury claim amounts at over
20% per annum, resulting in bodily injury claims cost inflation
of some 30%".[17]
2.4 Bodily injury claims are also often characterised
by disproportionate legal fees which mean that, for low value
claims in particular, more money ends up in the hands of claims
management companies and lawyers rather than with the injured.
The ABI surveyed over 50,000 low value motor accident claims (ie
claims under £5k) from September 2009 to March 2010, and
found that for every pound paid in compensation, a further 87p
was paid in legal costs (the claimant's costs only).[18]
2.5 The proliferation of claims management companies
in recent years is also fuelling claims inflation. On this, the
EMB report comments "From 2008 to 2009, Datamonitor reported
in 'UK Personal Injury Litigation 2009' that the number of companies
offering claims management services increased by over 50% from
1,409 to 2,232. As well as the numeric growth, the market leaders
have become increasingly aggressive in their efforts to win business".
2.6 Motor insurance has represented good value
for customers in recent years, with insurers making an underwriting
loss, that is claims and expenses exceeded premiums, for each
of the past 15 years. The underwriting loss reached a record £1.5
billion in 2009.[19]
These losses have often been manageable by insurers because they
have traditionally made some investment income on the premiums
they hold. This has often allowed then to make a small profit
on their motor account despite making an underwriting loss.
2.7 However, investment returns in the current
environment are limited. The combination of large underwriting
losses, substantial claims inflation and poor investment returns
has resulted in insurers having to increase their premiums in
order to try and return their motor insurance accounts into profit.
But the highly competitive nature of the market, in which round
50 insurers are active, will prevent insurers from making excessive
profits from this business.
2.8 The increasing problem of insurance fraud,
the number of uninsured drivers and the number and cost of whiplash
claims also have a major impact on the cost of motor insurance.
3. COMMENTS ON
THE SPECIFIC
ISSUES RAISED
BY THE
COMMITTEE
3.1 The main factors pushing up the cost of motor
insurance are:
consistent
underwriting losses and poor investment returns;
the increasing
number and cost of personal injury claims;
legal costs
associated with personal injury claims;
fraudulent
claims;
uninsured
driving; and
Whiplash.
The next section will examine these factors in some
more detail.
Consistent underwriting losses and poor investment
returns
3.2 The UK private motor insurance market has
not recorded an underwriting profit in any year since 1994. An
underwriting loss of £1.5 billion in 2009 represents the
largest loss on record. The net written premiums have consistently
stayed higher than the net claims incurred, but the expenses and
commission paid on top of these claims has meant the private motor
market has made an overall underwriting loss throughout the period.
Whist in some of these years insurers would have been able to
make investment returns on the premiums they hold, this is not
the case in the current economic climate.
The increasing number and costs of personal injury
claims
3.3 Government statistics show that the number
of accidents on the roads is decreasing: between 1996 and 2006,
the number of people killed or injured on British roads fell by
19%.[20]
However, the International Underwriting Association (IUA)/ABI
Bodily Injury Study[21]
found that the number of bodily injury claims paid out by insurers
increased at an annual rate of nearly 3% between 1996 and 2006.
There may be several reasons for this discrepancy: a higher proportion
of people involved in accidents may be making insurance claims
and/or the proportion of accidents being reported to the police
is falling. The ABI believes that it is a combination of both
factors.
3.4 However, since this 2006 study these trends
appear to have accelerated. It has recently been estimated that
bodily injury claims frequency has been increasing at 9% per annum
and average bodily injury claim amounts at over 20% per annum,
resulting in bodily injury claims cost inflation of some 30%".[22]
3.5 Although the ABI has not collected statistics
on the proportion of total motor insurance claims costs that arise
from bodily injury claims, feedback from members and EMB suggests
that the cost of BI claims as a proportion of total motor insurance
claims has more than doubled in the last 20ears and now accounts
for around half of all motor claims costs.
Legal costs associated with personal injury claims
3.6 The proliferation of claims management companies
in recent years is fuelling claims inflation.
3.7 ABI estimates that 10% of every motor insurance
premium is going to the legal profession. UK consumers are paying
£2.7 million a day to the legal profession through their
motor insurance premiums.[23]
We believe that more needs to be done to tackle these costs, for
example by backing the Jackson Review to introduce much needed
reforms into the personal injury claims process and to require
higher value claims to be referred to the Road Traffic Accident
(RTA) claims portal.
3.8 The portal, launched in April 2010, allows
claimant lawyers to electronically submit motor accident personal
injury claims details to insurers and provides a platform for
the electronic exchange of all relevant claim information and
documentation (including medical records).
3.9 Although official figures are not yet available,
it has been widely accepted by both insurers and claimant groups
that the portal has significantly reduced the costs associated
with the settlement of motor accident claims where liability is
not an issue. This is the case in the overwhelming majority of
motor accident claims.
3.10 It has also reduced the number of days that
it takes to settle a claim, meaning that claimants have been receiving
their compensation quicker than they would have done prior to
its introduction.
Fraudulent claims
3.11 Insurance fraud is also a growing problem.
We estimate that in 2009, £930 million of motor insurance
fraud went undetected, adding £39 to the cost of every motor
premium.[24]
Of even greater concern than the cost, organised motor fraud in
the form of staged motor accidents - where fraudsters cause accidents
in order to claim against honest policyholders - has significant
implications for road safety and, indeed, may help fund more serious
criminal activities. Tackling fraud is a priority for the insurance
industry. Insurers are investing more resources in detecting fraud
than ever before and are starting to see positive results - in
2009, insurers' detected 11% more fraud than in 2008.[25]
3.12 Key to tackling fraud is improved data sharing,
both within the industry and with other sectors. The ABI is currently
piloting the Insurance Fraud Register, an insurance industry database
of known frauds. As well as facilitating better data sharing between
insurers, the Register will also allow the insurance industry
to share data with the National Fraud Authority which provides
intelligence to enforcement agencies in order to disrupt fraud.
We are also in discussions with the DVLA to secure real-time access
to its driver licence database which will improve the accuracy
of the data on which insurers can set premiums.
Uninsured driving
3.13 Uninsured driving still costs honest motorists
of £500 million each year paid for through their insurance
premiums[26]
but uninsured drivers are more likely to get caught now than ever
before: improved detection techniques and enforcement of the law
has resulted in a reduction in uninsured driving in the UK in
the last four years. Since 2005 real progress has been made with
more than 600,000 vehicles seized for no insurance, contributing
to an overall 20% reduction of the number of claims from uninsured
and untraced motorists.[27]
However, more is needed to address the 4% of vehicles driven on
the road without insurance, particularly by introducing Continuous
Insurance Enforcement to make it an offence to keep a vehicle
without insurance.
Whiplash
3.14 Whiplash is also a major societal phenomenon.
ABI research reveals that over 432, 000 people make a whiplash
claim every year - equivalent to one in every 140 people in the
UK.[28]
This is six times more than the total number of people who make
workplace injury claims every year and the problem is getting
worse. 20% of every motor premium is paid out against whiplash
claims every year.[29]
The ABI 2008 publication Tackling Whiplash, Prevention, Care,
Compensation sets out our proposals to get to grips with this
issue for example by improving driver training and making people
more aware of how to adjust their headrests properly.
4..THE IMPACT
ON YOUNG
PEOPLE OF
THE HIGH
COSTS OF
MOTOR INSURANCE
4.1 It is important to recognise that, in the
case of young drivers in particular, the insurance premium charged
has little to do with the value of the car insured. The main purpose
of motor insurance is to meet the cost of any claim brought against
the driver by a third-party for injury or damage to their property,
including any associated legal costs. Tragically, it is all too
common for a young driver with young passengers in his car to
have a serious accident resulting death or serious injury. These
claims can run into many millions of pounds.
The ABI has been campaigning for some time for the
Government to introduce:
A minimum
one-year learning period for all learner drivers.
Passenger
restrictions so that newly-qualified drivers aged under 20 should
be limited to carrying no more than one passenger under age 20
during their first six months of driving.
Education
to change attitudes to driving among young people.
4.2 This package of measures should significantly
reduce the number of young people killed and injured on our roads.
5. CONCLUSIONS
5.1 The evidence presented in this paper makes
it clear that the recent increases in motor insurance premiums
are an inevitable, if unwelcome, market reaction to continuous
underwriting losses, increasing costs and falling investment returns.
However, the market remains very competitive and this will prevent
excessive profits being made by insurers.
5.2 Insurers do recognise the impact that these
price increases are having on customers but it should also be
recognised that these increases are a symptom of a number of wider
social and economic issues as described above. The ABI has been
actively campaigning on a number of issues over recent years to
reduce the number of accidents and injuries on our roads and to
make the process for compensating injured people more efficient
and fair. We believe that implementing some of or all of these
proposals is the most effective way will help to stem the increasing
costs of motor insurance.
November 2010
15 Review of Civil Litigation Costs: Final Report,
The Rt. Hon. Lord Justice Jackson, 2009. Back
16
Common Sense Common Safety, Lord Young of Graffham, 2010. Back
17
EMB Motor Insurance Industry Report, 2009. Back
18
ABI Research. Back
19
ABI Research. Back
20
IUA/ABI Fourth UK Bodily Injury Awards Study, 2007. Back
21
IUA/ABI Fourth UK Bodily Injury Awards Study, 2007. Back
22
EMB Motor Insurance Industry Report, 2009. Back
23
ABI Research. Back
24
ABI, General Insurance Claims Fraud, 2009. Back
25
ABI statistics, 2008 & 2009. Back
26
Motor Insurance Bureau Key Facts. Back
27
Motor Insurance Bureau Annual Report, 2009. Back
28
ABI Tackling Whiplash, Prevention, Care, Compensation, 2008. Back
29
ABI Tackling Whiplash, Prevention, Care, Compensation, 2008. Back
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