Written evidence from AA Insurance (CMI
17)
1. INTRODUCTION
1.1 The Transport Committee is conducting an
enquiry into the cost of motor insurance, focusing on the following
areas:
Reasons and
consequences of recent increases in the cost of motor insurance.
Impact on
young people of the high cost of motor insurance.
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.
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.
1.2 AA Insurance has been one of the UK's leading
private motor insurance brokers in the UK since 1967. It also
of course represents the interests of its 15 million roadside
assistance members and is a leading commentator on motoring and
insurance issues; it also operates a national driving school.
1.3 In addition, AA Insurance has since 1994
published its benchmark "AA British Insurance Premium Index"
which tracks the quarterly movement of car and home insurance
premiums.
1.4 This Index has become a benchmark study and
is closely followed by the insurance industry, the analyst community
and by the media.
1.5 This submission comments on all of the points
identified in the Committee's request for submissions but focusing
on the reasons for, and effect of, high premiums suffered by young
drivers.
2. THE REASONS
AND CONSEQUENCES
OF RECENT
INCREASES IN
THE COST
OF MOTOR
INSURANCE
2.1 The cost of motor insurance in the UK has
risen substantially since the middle of 2009, as tracked by the
AA's British Insurance Premium Index (BIPI). This followed a long
period when premiums moved little or even fell, because of competitive
pressure and the advent of the price comparison sites in the motor
insurance market. This was despite rising costs of accident damage,
fraud and personal injury claims.
2.2 Five years ago, AA Insurance warned that
a consequence of this would be a sharp increase in premiums that:
"would be difficult to explain to our customers" (appendix
1).
2.3 The most recent BIPI published in October
2010 (appendix 2), for the third quarter, shows that premiums
have continued to rise sharply. Key findings are:
2.3.1 Shoparound Index (average of lowest three
quotes from about 90 insurance providers on a basket of 2,500
comprehensive risks):
Overall: up 11.5% (quarter)
and 39.3% (12 months) to £792
2.3.2 Drivers aged 17-22: up 14.4% (quarter)
and 50.9% (12 months) to £1,956
2.3.3 Young men pay considerably higher premiums
than women of the same age. For the 17-22 age group, the BIPI
averages are:
Men: £2,457
Women: £1,423
2.4 The primary causes of premium increases
are:
2.4.1 Claims for personal injury, encouraged
by a rapid growth in the number of personal injury claims management
firms which are using direct cold-call marketing techniques to
encourage people to make claims who otherwise would not have done
so, or to make claims for injuries that in fact, have not been
suffered or which may not be as severe as claimed: typically mild
soft tissue damage causing pain in neck and shoulders (whiplash),
which is difficult to medically diagnose. Fraud, not just fraudulent
personal injury claims (see above) but other attempts to defraud
the insurers including "fronting" (typically by adding
a young person as a named driver to a policy bought by a parent,
when the young person is the main driver); non-disclosure of past
claims or convictions; taking out a policy by monthly direct-debit
payment and cancelling the payments once insurance documents are
delivered; lying about age, occupation or where the car is kept;
and driving without insurance.
2.4.2 There are many estimates of what fraud
costs the insurance industry and the most recent, from analysts
Towers Watson (October 2010), suggests that fraudulent
claims add just over £80 for every motor policy. According
to the ABI, undetected general insurance fraud costs insurers
£1.9 billion per annum.
2.4.3 Financial Services Authority (FSA) returns
show an industry combined loss ratio of 120% driven by an estimated
30,000 fraudulent accident claims in 2009. Fitch Ratings estimate
that the loss ratio is currently 123% - in other words, for every
£100 taken in premiums, £123 is being paid out in claims.
2.4.4 Insurers have, therefore, been making significant
underwriting losses - and some, such as HSBC and NIG, have withdrawn
from the market altogether.
2.4.5 These figures are despite the falling number
of road collisions and those killed or seriously injured (KSI)
on Britain's roads. Amongst car drivers, the casualty figures
fell by 10% to 4,839 KSI in 2009 (source: Department for Transport)
but there is little change in the casualties amongst young drivers.
Of men, 30.1%
of the total KSI is drivers aged 24 and under.
Of women,
24.3% of the total are aged 24 and under. However:
There are
more than twice as many casualties amongst young men (1,461) than
for young women.
2.4.6 The effect of increasing numbers and costs
of personal injury claims has increased insurers' costs by at
least 30% per annum: a huge increase against the background of
falling accident rates (source: Institute of Actuaries).
2.4.7 In addition, the ABI has released figures
that show motorists are paying 10p in the £1 to pay for personal
injury claim lawyers, which found that while the average personal
injury claim following a road collision was £2,430, the average
payment for legal costs was £2,100. The industry is paying
an estimated £2.7 million every day to personal injury firms.
3. IMPACT ON
YOUNG PEOPLE
OF THE
HIGH COSTS
OF MOTOR
INSURANCE
3.1 The brunt of premium increases, as described
in paragraph 2.3.1 is being borne by young drivers, particularly
young men. The first premium for a teenage driver, especially
a young man, can run to several thousand pounds even for a modest
car
3.2 Many insurers will no longer insure young
drivers and an exploration on any price comparison site will show
that more than half of insurers will not quote. As a result, the
young driver insurance market is less competitive and young drivers
have less choice.
3.3 This is because of the size and frequency
of claims made by this group:
3.3.1 By age 18, 10% of young people have been
in a crash where someone has been killed or seriously injured
3.3.2 74% of all deaths amongst young adults
are on the road (Source: Home Office) yet only 10% of parents
consider it to be the biggest threat to them (they believe their
youngsters are more at threat from knife crime) (source: AA/Populus
study).
3.3.3 In 2009, for the first time since 2004,
more 16-19 year olds died as passengers in cars than those who
died as drivers (source: Department for Transport).
3.3.4 Drivers of vehicles aged 10 years or older,
those most likely to be driven by young men, are disproportionately
involved in speed-related crashes (source: Department for Transport).
3.3.5 Only one in eight drivers are under 25
but one in five who die are in this age group
3.3.6 Under age-21 male drivers are 10 times
more likely to have an accident than those aged 35 or over; under
age-21 female drivers are five times more likely to have an accident
than those aged 35 or over.
3.3.7 Average claim value for under-21s is three
times greater than for those aged 30 and above.
3.3.8 Number of multi-million pound PI claims
is increasing: cost of causing injury leaving permanent scarring,
£3 million; cost of putting a passenger in a wheelchair for
life, £17 million - two examples of typical serious PI claims.
3.3.9 50% of collisions amongst under-21s happen
at night compared with 30% amongst those aged 30 or over.
3.4 The above statistics are having a major impact
on young drivers. There is considerable evidence to suggest that
a growing number of young drivers will learn to drive (and possibly
pass their driving test) while in their teens, but then don't
bother to buy a car or continue driving until their 20s. This
is partly because the cost of insurance is typically much greater
than the value of a first 10-year-old car and partly because they
go to University and don't need to drive.
3.5 A 25-year-old buying their first car will
typically pay a first car insurance premium a third cheaper than
that of a teenager because insurers' claims experiences shows
that more mature young adults are less likely to make a claim.
3.6 This suggests that a high proportion of young
drivers are those who do not go to university and for whom the
car is likely to have greater importance as a symbol.of status
amongst their peer group. This is likely to be one reason why,
as previously identified, there is a high number of young drivers
and passengers killed or seriously injured in this age group.
3.7 The AA believes that the insurance industry,
road safety organisations, the Government, education authorities,
groups representing young people must work together to stop the
carnage on Britain's roads and thus enable them to obtain affordable
car insurance. Although there have been initiatives to do this,
for example DSA's Pass Plus training, they have little effect
on insurers' claims experience and, as a result, premium discounts
are increasingly less likely to be offered.
3.8 The AA believes that effective training and
education is fundamental to improving the crash record of young
people. It also believes however, that while proposed changes
to the driving test will have minimal impact on the number of
casualties amongst young drivers, it is nevertheless a step in
the right direction but needs to go much further and is already
exploring ways to help.
3.9 Some initiatives being taken by The AA include:
Sponsorship
of a new academic qualification in driving, a BTEC.
Drive Smart
courses offered free through the AA Charitable Trust to at-risk
young drivers, ie those who have convictions or have been involved
in collisions.
Development
of a new insurance product that uses technology to measure driving
standards and provide feedback to help improve driving standards.
4. EXTENT TO
WHICH COST
OF MOTOR
INSURANCE IS
INFLUENCED BY
PREVALENCE OF
ROAD ACCIDENTS,
INSURANCE FRAUD,
LEGAL COSTS
AND UNINSURED
DRIVERS
4.1 Much of this has already been covered but
to summarise:
4.2 Prevalence of road accidents
4.2.1 Road accidents are a determinant of insurance
premiums. Premiums are based on claims experience using a range
of rating factors that include age, sex, occupation, driving experience,
type of car, home address etc that combine to calculate likelihood
of making a claim (both accident and theft claims) in order to
determine a premium derived from this combination of factors.
4.2.2 Although the number of accidents has declined
on Britain's roads the costs of meeting claims have been rising
steadily over a long period, to the extent that premiums have
had to respond by rising sharply, exacerbated by the recession
which has reduced insurers investment income (see also paragraph
2.2 and appendix 1). However, the cost of collision repairs
has been rising because of the growing complexity of modern motor
cars, while personal injury and fraud have more than offset any
benefit in terms of reduced numbers of collisions.
4.3 Insurance fraud
4.3.1 Insurance fraud is a matter of considerable
concern to the insurance industry and there is a range of estimates
surrounding the cost to insurers, and thus the premiums paid by
motorists. ABI estimates that £930 million of motor insurance
fraud went undetected in 2009, adding £39 to the cost of
an average motor premium (source: ABI General Insurance Claims
Fraud, 2009) although as mentioned in paragraph 2.4.2 some
estimates put this at up to £80 (Source: Fitch Ratings,
October 2010). The ABI, on top of this, estimates that the
value of detected fraud is the equivalent of £44 on every
household's annual insurance costs.
4.3.2 There have been well-publicised cases of
organised cash-for crash scams that have a fraudulent claims management
company at its heart but there is evidence that many ordinary
drivers are indulging in this practice in order to benefit from
a non-existent whiplash injury claim. A recent report suggested
that one out of every 20 motorists aged under 35 has deliberately
braked in such a way as to cause the following motorist to collide
with them, placing the responsibility for meeting the claim on
the following driver (source: moneysupermarket survey, September
2010). This is a deeply worrying development.
4.3.3 There are many other forms of fraud as
described in paragraph 2.4.1 and much of this could be prevented
if insurers had routine access to the DVLA database which would
confirm factors such as age, address, driving experience, number
of convictions - all of which influence premium.
4.3.4 The AA is concerned that many of the factors
mentioned above can be easily manipulated through the relative
anonymity of price comparison sites. For example by going back
and deleting a motoring conviction which would reduce the premium
might be tempting for many applicants. The AA urges the operators
of price comparison sites to improve their technology to reduce
the ability of buyers to frequently manipulate factors that determine
premium.
4.4 Legal costs
4.4.1 Legal costs have had a significant impact
on motor premiums. According to the ABI, just under half of every
personal injury claim is accounted for by legal costs.
4.4.2 The AA welcomes the recommendations put
forward by Lord Justice Jackson in his review of civil litigation
and urges the measures to be introduced as soon as possible. These
include fixing legal fees for personal injury claims as well as
capping the amount of income lawyers can make in no-win no-fee
claims and curbing cold-call advertising. It is vital that this
culture of compensation is firmly addressed and unless this happens,
the cycle of rising premiums will continue.
4.4.3 Lord Young of Graffham has also made a
number of widely-reported comments about the compensation culture
based on his report (Common Sense, Common Safety) to the
Prime Minister. At the Conservative Party conference he pointed
out that the compensation culture has created a climate of fear
of being sued and said: "This is not access to justice, this
is incitement to litigate and it must stop." (source:
Insurance Times). His recommendation that restrictions must
be imposed on the type and volume of advertising by claims management
organisations is welcome.
4.5 Uninsured driving
4.5.1 Uninsured driving has been an issue in
the UK for some time with on average, one out of every 20 motorists
driving without cover (source: MIB). The advent of continuous
insurance enforcement and real-time updating of the Motor Insurance
Database (MID) will improve identity of cars that are uninsured.
But, of course, it cannot identify those who may not be insured
to drive an otherwise insured car. Nevertheless, the increasing
use of automatic number plate recognition technology by the police
(which draws its data from the MID) has helped to stop this blight
from increasing. It is still an issue but no longer a major contributor
to rising premiums. Even so, uninsured drivers still cost approximately
£30 for every motor insurance policy in force through the
levy paid by insurers to the MIB.
The introduction of Continuous Insurance Enforcement
(CIE), while welcome, carries the risk of increasing the number
of uninsured drivers and thus the possibility of increased insurance
premiums.
5. PUBLIC POLICY
IMPLICATIONS
5.1 As this paper implies, personal injury claims
and fraud are the main drivers of rising car insurance premiums.
5.2 For young drivers, the appalling number of
collisions and injuries are forcing up premiums to unaffordable
levels, especially for young men.
5.3 The AA would like to see:
5.3.1 the recommendations of the Jackson Review
implemented as soon as possible (paragraph 4.4.2).
5.3.2 regulation of the claims management industry,
as proposed by Lord Young (paragraph 4.2.3).
5.3.3 the Government explore how other systems
control compensation culture. For example, Scotland and Republic
of Ireland control the minor injury claims system so that legal
costs are significantly reduced. In Germany, courts assume that
any collision below 10kn/h cannot cause whiplash injury. Measures
of this sort in the UK would wipe out a significant number of
personal injury claims.
5.3.4 measure put in place to allow insurers
to routinely access the DVLA database as soon as possible, to
confirm that information provided by customers (ie driving experience,
convictions, address, age, type of licence held) is correct.
5.3.5 driving and road safety as part of the
National Curriculum to build awareness of the implications and
responsibility of driving a motor car. AA is involved in this
process by sponsoring a new BTEC qualification in driving.
5.3.6 the Government strongly resist calls from
the EU Advocate General to end the use of gender in the calculation
of car insurance premiums. Such a move would increase insurance
premiums for everyone, especially young women. It would also risk
many insurers choosing not to cover any young driver, reducing
competition and choice.
5.3.7 There is anecdotal evidence that there
is a propensity amongst those who commit minor insurance fraud
to also be involved in other fraudulent or criminal activity,
for example benefit crime, avoiding work, unpaid parking offences,
petty crime, avoidance of tax and other minor fraud, adding significant
costs to other agencies. We would like to see a better co-ordination
with the police and justice system to take such criminal activity
into account and appropriate penalties imposed.
APPENDIX 1
"VIEW FROM THE TOP" COLUMN PUBLISHED
IN POST MAGAZINE JUNE 2005
Not re-printed here.
APPENDIX 2:
BRITISH INSURANCE PREMIUMS PRESS RELEASE,
OCTOBER 2010
AA BRITISH INSURANCE
PREMIUM INDEX:
CAR INSURANCE
Young drivers hit in biggest annual premium increase,
says AA Index
14 October 2010:
The latest benchmark AA British Insurance Premium Index shows
no respite from fast-rising premiums, as another record high is
reached.
Over the past quarter, motorists absorbed an increase
of 11.5% according to the Shoparound index, which is an average
of the cheapest three quotes for each "customer" in
the Index basket of 2,800 risks. But over the 12 months ending
30 September the Shoparound cost of an annual comprehensive car
insurance policy had risen by 39.3% to £792, the biggest
annual jump recorded by the Index.
Young drivers are being hit with the biggest premium
increases. Over the past 12 months the average cost of insurance
has jumped by 51% for those aged between 17 and 22: after shopping
around for their cover, men of this age can now expect to pay
an annual premium of around £2,500 and women £1,400.
Simon Douglas, director of AA Insurance, says: "Recent
road casualty statistics from the Department for Transport[32]
show that a third of men who are killed or seriously injured on
Britain's roads are under 25, while the number of young passengers
who die in car crashes exceeded the number young drivers killed
for the first time in six years. Indeed, car crashes are by far
the biggest threat to life amongst young people - considerably
more than drugs or knife crime, for instance.[33]
"These are shocking statistics that underline
why insurance premiums for young drivers are soaring. Multi-million
pound injury claims are no longer unusual."
Douglas adds: "It's vital that the insurance
industry, road safety organisations and the government work together
to stem this terrible toll on young lives."
The AA already offers "Drive Smart" courses
and, for those who have been involved in car crashes or have driving
convictions, they are free through the AA Charitable Trust. In
addition, the AA is sponsoring a new BTEC qualification in driving
behaviour, while a new insurance product that rewards good driving
is expected to be launched next year.
But all drivers have been affected by fast-rising
premiums over the past 12 months. Douglas says that recent years
have seen intense competition encouraged by the growth of price
comparison sites, which had kept premiums artificially low to
the point that many insurance companies were making large losses
on car insurance business.
"Five years ago we warned that sharp premium
inflation would be the result of this competition but recession
has added to the pain. A proliferation of personal injury claim
lawyers has also led to the number of injury claims across the
board sharply increase, while fraud has eaten into insurers' costs
to the extent that over the past year, for every £100 taken
in premiums, £123 has been paid out in claims," he says.
Premium increases will continue through into 2011,
Douglas believes. "Although the quarterly increases are a
little less than the previous quarter, the annual increase was
the largest since the AA Index started in 1994, I expect premium
inflation to be less severe in future."
Summary car insurance statistics, quarter ending
30 September 2010 follow
Main Index findings for third quarter 2010
Comprehensive
cover up 11.7% (quarter) and 29.9% (12 months) to £1,249.71;
and
Third party,
fire and theft (TPFT) cover up 9.8% (quarter) and 32.2% (12 months)
to £1,246.41.
Shoparound index findings (average of cheapest
three quotes for each risk)
Comprehensive
cover up 11.5% (quarter) and 39.3% (12 months) to £791.82;
and
TPFT cover
up 12.1% (quarter) and 54.6% (12 months) to £1,097.72.
Main Comparison site price movements
Comprehensive
cover up 13.4% (quarter) to £888.84;* and
TPFT cover
up 13.1% (quarter) to £909.02.*
Shoparound comparison site price movements
Comprehensive
cover up 10.3% to 592.08;* and
TPFT cover
up 9.2% to 764.77*.
* Comparison site premiums have only been tracked
since Q4 2009 so annual figures not available
Douglas believes that the insurance industry, road
safety organisations and the government should work together to
find ways to help young drivers become safe and responsible car
drivers.
"This can partly be achieved through education,
such as "Drive Smart" courses in safe and fuel-efficient
driving offered by the AA Driving School. The courses are available
free to at-risk new drivers through the AA Charitable Trust.*
Similarly, a new BTEC in driving science is being sponsored by
the AA.
"New electronic insurance solutions are also
being developed that reward safe driving technique which could
significantly bring down premiums."
He adds that despite high initial premiums the most
effective way to reduce them is through claim-free driving, which
after just one year will bring premiums down by up to a third.
"That's a powerful financial incentive to drive responsibly,"
he says, but warns that those who attempt to drive without insurance
or use fraudulent means to obtain a cheaper premium, such as fronting,
are very likely to be caught.
* Information about Drive Smart: www.theaa.com/drive-smart
What the Index tracks
The British Insurance Premium Index records premium
movements for 2,800 car insurance "customers" throughout
the UK, from more than 80 insurers, brokers and schemes. The premiums
are averaged to provide a market "average quoted premium"
while the Shoparound premium is an average of the cheapest three
premiums returned for each "customer" in the basket
of risks, and is thus closer to what customers pay for their cover.
For home insurance average premium movements are calculated from
750 customers in the basket of risks and from about 75 insurers,
brokers and schemes.
The same basket of risks is used to calculate average
premiums from price comparison sites.
AVERAGE PREMIUMS (MOTOR) OCTOBER 2010
| Market Summary
|
| Average Premium | Oct-10
| Jul-10 | % Change
| Oct-09 | % Change
| Jul-94 | % Change
|
| Comprehensive | £1,249.71
| £1,119.29 | + 11.7% |
£962.18 | + 29.9% | £384.50
| + 225.0% |
| TPFT Fire & Theft | £1,246.41
| £1,135.46 | + 9.8% |
£943.08 | + 32.2% | £333.39
| + 273.9% |
| Shoparound Summary
|
| Average Premium | Oct-10
| Jul-10 | % Change
| Oct-09 | % Change
| |
| Comprehensive | £791.82
| £709.91 | + 11.5% | £568.62
| + 39.9% | Shoparound only
recorded since 2004
|
| TPFT Fire & Theft | £1,097.72
| £979.66 | + 12.1% | £710.24
| + 54.6% | |
AGGREGATOR AVERAGE PREMIUMS (MOTOR) OCTOBER 2010
| Market Summary
|
| Average Premium | Oct-10
| Jul-10 | % Change
| |
| Comprehensive | £888.84
| £784.08 | + 13.4% | Aggregator prices only recorded since Q4 2009
|
| TPFT Fire & Theft | £909.02
| £803.88 | + 13.1% |
|
| Shoparound Summary
|
| Average Premium | Oct-10
| Jul-10 | % Change
| |
| Comprehensive | £592.08
| £536.70 | + 10.3% | Aggregator prices only recorded since Q4 2009
|
| TPFT Fire & Theft | £764.77
| £700.36 | + 9.2% |
|
ANNUAL SHOPAROUND MOVEMENTS BY AGE AND GENDER
| Sex | Age
| Ave Premium | Shoparound
|
| | | Oct 10
| Jan-10 | Apr-10
| Jul-10 | Oct-10
| Annual |
| Male | 17 - 22 | £2,457
| + 9.6% | + 2.8%
| + 14.7% | + 13.5%
| + 46.6% |
| | 23 - 29 | £1,191
| + 15.4% | - 1.4%
| + 11.2% | + 10.7%
| + 40.0% |
| | 30 - 39 | £651
| + 8.8% | - 0.0%
| + 11.1% | + 7.3%
| + 29.7% |
| | 40 - 49 | £581
| + 10.3% | - 2.5%
| + 7.9% | + 10.3%
| + 28.0% |
| | 50 - 59 | £473
| + 16.0% | - 6.1%
| + 8.4% | + 8.1%
| + 27.6% |
| | 60 - 69 | £420
| + 9.0% | - 0.8%
| + 7.8% | + 11.8%
| + 30.3% |
| | 70 + | £519
| + 9.4% | - 0.1%
| + 11.4% | + 11.7%
| + 36.1% |
| | |
| |
| |
| |
| Female | 17 - 22 | £1,423
| + 9.9% | + 7.0%
| + 16.9% | + 15.5%
| + 58.7% |
| | 23 - 29 | £793
| + 12.2% | + 3.1%
| + 11.4% | + 10.5%
| + 42.4% |
| | 30 - 39 | £512
| + 10.9% | - 0.7%
| + 7.3% | + 8.7%
| + 28.4% |
| | 40 - 49 | £500
| + 13.8% | - 2.2%
| + 6.9% | + 12.2%
| + 33.5% |
| | 50 - 59 | £434
| + 13.9% | - 4.0%
| + 8.1% | + 11.4%
| + 31.7% |
| | 60 - 69 | £354
| + 9.2% | - 1.6%
| + 6.9% | + 8.2%
| + 24.2% |
| | 70 + | £387
| + 4.2% | + 1.4%
| + 9.9% | + 2.3%
| + 18.9% |
| | |
| |
| |
| |
| All | 17 - 22 | £1,956
| + 9.7% | + 4.2%
| + 15.4% | + 14.4%
| + 50.9% |
| | 23 - 29 | £989
| + 14.1% | + 0.4%
| + 11.3% | + 10.6%
| + 40.9% |
| | 30 - 39 | £582
| + 9.7% | - 0.3%
| + 9.4% | + 7.9%
| + 29.1% |
| | 40 - 49 | £540
| + 11.9% | - 2.4%
| + 7.5% | + 11.1%
| + 30.5% |
| | 50 - 59 | £452
| + 15.0% | - 5.1%
| + 8.2% | + 9.8%
| + 29.7% |
| | 60 - 69 | £390
| + 9.1% | - 1.1%
| + 7.4% | + 10.2%
| + 27.6% |
| | 70 + | £448
| + 7.0% | + 0.6%
| + 10.7% | + 7.1%
| + 27.6% |
GRAPHIC HERE
November 2010
32 Department
for Transport, road casualties 2009 Back
33 74%
of all accidental deaths amongst young adults happen on the road,
yet only 10% of parents considered this to be the biggest threat
to them; knife crime belived to be the biggest threat (AA/Populus
study of 18,500 AA members, September 2010) Back
| 
