Written evidence from the British Insurance
Brokers' Association (BIBA) (CMI 19)
The British Insurance Brokers' Association (BIBA)
is the UK's leading general insurance organisation representing
the interests of insurance brokers, intermediaries and their customers.
BIBA membership includes 1,700 regulated firms. Insurance
brokers and intermediaries distribute nearly two-thirds of all
UK general insurance. BIBA believe that approximately 50% of the
UK's private motor insurance is sold through insurance brokers.
This could be direct with brokers or through broker led affinity
schemes or broker products on comparison sites. BIBA would like
to thank the Transport Select Committee for the opportunity to
respond to inquiry.
EXECUTIVE SUMMARY
BIBA has been anticipating increases in private
motor insurance rates for some time, with insurers making significant
underwriting losses during the last 14 successive years.
The soft market could not continue ad infinitum because of the
reduction in investment income, rapid claims inflation,
the intense competition and unsustainable rates from comparison
sites. This is combined with aggressive pricing strategies
such as dual pricing and illegal activities including fraud
and uninsured driving. Customers have benefited
from cheap premiums for many years but now the bubble has burst.
BIBA has outlined an eight point plan where we believe
the Government can help.
This document is split into two parts. Part one is
our general commentary on the issues. Part two is specific responses
to the Transport Select Committee questions.
PART 1 BIBA COMMENTARY
1. The state of the motor insurance market increases
1.1 BIBA believes that motor insurance price
rises have been inevitable due to the financial losses being made
by motor insurers. The key numbers are:
- £1.5
billion underwriting loss in 2009;[36]
- 14
successive years of underwriting losses;[37]
- for
every £100 collected in premium £122 is paid in claims;[38]
and
- expected
£1billion underwriting loss in 2010.[39]
2. Cause of increases
Claims Inflation
2.1 BIBA members have reported significant claims
inflation. For example, a large BIBA broker reports that seven
years ago the propensity to claim for a non-fault injury
following a motor accident was 20%. In 2010 this major broker
now reports this has increased to 60%. Insurer Esure have also
reported to us a 300% sudden increase in personal injury claims
in the B31 postcode despite there being no increase in accidental
damage claims. For every £1 Esure collect in premium they
are now paying out £3 in personal injury claims in B31.
2.2 Not only has the propensity to claim increased
but the amounts awarded are also at a record level with
awards of £13 million recently being highlighted in the press
and the average bodily injury claim award increasing at at least
double the rate of inflation.
2.3 Change to the claims culture in the UK has
been dramatic ever since Claims Direct and many others in the
legal profession started major TV and media campaigns to encourage
people to try to claim at every opportunity with a no win no fee
offer. There is now a very high willingness to pursue a claim
in the UK and the inevitable effect of this is an increase in
premium to cover these extra costs.
2.4 The growth of Claims management companies/accident
management companies has also been a significant development
in recent years and we estimate they add at least £1 billion
to the cost of motor claims in the UK. Although these claims management
companies can offer important services to help customers with
credit hire vehicles and help in pursuing recovery of uninsured
losses they have also added a new level of costs, some of which
our members believe are exaggerated and unnecessary.
Reduced Investment Income
2.5 There are three main reasons why insurers
can no longer afford to run at an underwriting loss and rely instead
on their investment returns, these are:
- The Economic
Downturn—The worldwide financial crisis has seen the
returns on investments reduce dramatically.
- Capital
adequacy solvency II—Greater capital
adequacy requirements from Europe mean that insurers must have
a more conservative balance sheet and therefore are not able to
invest as much as they have in the past.
- Fewer
reserves—insurers reserves have
been under pressure and rather than continuing to use dwindling
reserves they must now charge a higher premium that better reflects
the risks on their books.
Competition/Commoditisation
2.6 Comparison sites - Insurance
comparison sites have seen incredible growth, however this phenomenon
has only recently come to prominence, since the introduction of
the Financial Services Authority (FSA) insurance regulatory rules
in 2005. We feel that more appropriate rules should apply.
2.7 For example, BIBA believes that where prices
are reported by a comparison site they must reflect the product
criteria searched for. Unfortunately this is not what is always
happening as many sites return quotes that do not reflect
the customers requested cover and instead may introduce a high
excess in order to generate the lowest possible premium (so they
can get the business). This reduces the premium "pool".
2.8 The effect that comparison sites have had
on the market has been huge with some of our major brokers making
80% of their sales through comparison sites. They have proven
to be a popular medium for buying insurance with customers. However,
the premiums being charged on comparison sites are below the level
of what is reasonable and profitable for an insurer in many instances.
Competition is good but comparison sites have created what many
BIBA brokers believe to be unsustainable pricing and the customer
has been persuaded to purely search for the cheapest price due
to continued television advertising and the sites being marketed
as "price comparison sites" as opposed to "insurance
comparison sites".
2.9 Comparison sites have also introduced another
level of cost to the industry but insurers are compelled to use
them as they are powerful and control a large amount of volume/turnover.
Another negative side effect from the comparison site is that
some insurers have felt they are not prepared or are unable to
compete and have withdrawn some products from the market.
2.10 Some insurers have withdrawn certain products
or withdrawn completely from the market. These include: NIG, AXA
Premier 35, Quinn, QBE Motor, Zenith (now Markerstudy). Equity
motor has reduced market share by a high percentage and withdrawn
delegated schemes KGM has significantly reduced capacity. Many
Aviva Delegated Schemes have been withdrawn: other withdrawals
or reduction in capacity include Corinthian (HSBC), RSA has withdrawn
most delegated schemes, Highway (have been acquired by LV), Paragon,
Brit Insurance Schemes, Prestige and Europa (underwriting Agency)
have all reduced capacity.
2.11 There are some major motor insurers up for
sale as well which could reduce the competition. Other insurers
have increased their rates by more than 40% but say that they
are still prepared to write private motor business (our members
give the examples of Zurich and Brit).
Crime
2.12 Uninsured drivers cost the innocent
motorist more than[40]
£500 million a year and this cost is passed on to motor insurance
policies at approximately £30 per policy. The UK has the
highest levels of uninsured driving in western Europe but this
is somewhere we believe the Government can act, please see section
3.1. Continuous Insurance Enforcement.
2.13 Fraudulent claims have been
on the increase with fraudulent motor claims costing up to £930
million a year.[41]
There are many more staged accidents than there used to be as
criminal gangs see the insurance industry as a soft target.
2.14 Fraudulent misrepresentation is another
worrying side effect that has been flourishing following the success
of internet sales and comparison sites. BIBA believes that the
lowest levels of fraudulent misrepresentation occur when there
is a face-to-face sale eg with an insurance broker. Misrepresentation
increases when people buy from a call centre, but the highest
level of misrepresentation occurs, when people buy from the internet.
2.15 Some comparison sites prompt people to get
cheaper premiums by making changes to their proposal and some
personal finance websites such as "Money Saving Expert"
have even encouraged people to change their job title to seek
a lower quote via his "job picker" tool. It is far easier
for a customer to lie or fail to include a fact on a comparison
site that makes assumptions about people and does not even ask
them all the questions directly.
3. Steps that the Government can take to help:
Continuous Insurance Enforcement (CIE)
3.1 The Government must press ahead with the
introduction of CIE to reduce uninsured driving costs. (CIE is
the new enforcement system that will systematically compare the
DVLA registered keepers database with the Motor Insurance Database
(MID) and industry, uninsured drivers and ensure they obtain insurance
by an escalating system of penalties. It is also important that
the Government support DVLA and the insurance industry with an
effective CIE awareness campaign so that DVLA can fulfill their
duty to make vehicle keepers aware of changes in the law. This
should ultimately reduce uninsured driving and the Motor Insurers
Bureau (MIB) levy.
Signpost people to relevant broker where they
can find competitive cover (particularly
young or non standard drivers)
3.2 Signposting is an important industry solution
at no cost to Government. There are important benefits to consumers,
particularly those in the more vulnerable age groups with more
people being able to find insurance, meaning fewer are left uninsured
and unprotected. The Government will benefit with an increased
IPT income to Treasury.
3.3 Research carried out as part of the insurance
industry "stay insured" campaign demonstrated that young
drivers have a poor insurance record as research suggests that
20% or 243,000 of the 1.2 million people, aged between 17 to 20
years old on Britain's roads, do not have motor insurance.
3.4 These drivers are often rejected by comparison
sites, banks or supermarkets due to their higher risk profile
but they are often unaware that there are specialist insurance
brokers who would be able to cater for them.
3.5 To resolve this problem we need to signpost
young, inexperienced drivers to suitable insurance providers.
Professor Greenaway recommended among other things in his report,
"uninsured driving in the UK" that the Department for
Transport should have an easily navigable portal on the Driver
and Vehicle Licensing Agency and Driving Standards Agency website,
and that this should provide rapid access to information. Signposting
from these sites is therefore important.
3.6 BIBA believes that signposting drivers, and
particularly signposting uninsured drivers to a suitable insurance
broker which can offer cover and an instalment facility will have
a very positive effect on the rate of uninsured driving.
3.7 Most importantly there are road safety benefits
as insured drivers are less likely to leave the scene of an accident.
3.8 Therefore by signposting more consumers to
appropriate sources of insurance the financial burden will be
spread across the wider insurance industry that is benefiting
from the additional premium of insured clients.
3.9 BIBA sits on the HM Treasury Signposting
steering group and the opportunity exists for Government to write
into the Equality Act regulations a requirement for the insurance
industry to signpost rejected customers to a more suitable source.
We strongly urge the Government to put through their regulations.
BIBA already helped more than 340,000 people a year find suitable
cover from a broker via our Find a Broker website www.biba.org.uk
and our call centre 0870 950 1790.
Regulate Comparison Sites to the Appropriate Standard
3.10 BIBA has sent a detailed response to the
Office of Fair Trading and the FSA about appropriate regulation
of comparison sites but BIBA does not wish to burden this committee
with all of these issues. However we do believe comparison sites
are so powerful that they must be more appropriately regulated
and the prices reported by the sites must reflect the product
criteria searched for, the quotes should be guaranteed, excesses
should be clear, "check with insurer" must no longer
be allowed, and assumptions must no longer be permitted. This
would lead to a cleaner, clearer and more appropriately priced
motor insurance market.
Review Pass Plus
3.11 The Pass Plus system is a good idea and
BIBA supports post test training. However the system is in need
of an update as the claims costs to insurers of those that have
undertaken the scheme do not appear to differ much from those
that have not. Therefore we would recommend a root and branch
review of post test training.
Review the Driving Test
3.12 The current driving test has some gaps which
if attended to could improve the high claims frequency and severity
experienced by young drivers. In particular better attention could
be paid to:
Hazard Perception.
Attitude awareness.
Situational
Judgement.
Lord Justice Jackson's Review of Civil Litigation
Costs
3.13 Claims costs are spiralling and BIBA believes
that the report on civil litigation costs by Lord Jackson should
be progressed, although we do not believe a ban on referral fees
is appropriate. The personal injury claims portal helps reduce
the cost of legal fees and we believe that the use of this could
be expanded by allowing higher value claims to be dealt with in
this way. This should reduce the cost to the industry and provide
a swifter settlement of claims to the customer.
Insurance Premium Tax
3.14 On 4 January 2010 Insurance Premium tax
increases to 6%, we would suggest a delay to this or even an IPT
"holiday" could ease the pressure for motorists while
the market adjusts to the harder rates.
Access to Driving Licence Records
3.15 BIBA has been working with the DVLA, DFT,
MIB and the ABI with a view to agreeing secure access to driving
licence records from the DVLA database. By verifying licence types,
lengths held, dates of birth, address, convictions and penalty
points a great deal of fraud could be prevented and the fair and
correct premium applied to the risk. If the Government can agree
to this access the cost of fraud could be reduced.
PART 2 - BIBA RESPONSE
TO TRANSPORT
SELECT COMMITTEES
QUESTIONS:
4. The reasons and consequences of recent
increases in the cost of motor insurance?
4.1 As detailed in our part 1 response,
there is no single reason for the increase, it is purely a case
of claims costs outweighing the income. The main reasons are:
4.2 Claims inflation - The increase in
the propensity to claim, the increase in the amounts awarded,
the impact of claims management companies and the increases in
the number of whiplash claims.
4.3 Reduced investment income
- The economic downturn reducing return on investments, the impact
of solvency II and reduction in reserves.
4.4 Competition - While
there is a short term gain for consumers with low prices on comparison
sites these prices have proven unsustainable.
4.5 Commoditisation - Comparison
sites have effectively commoditised motor insurance but due to
insufficient regulation are offering low level cover and premiums
that are often below burning cost.
4.6 Insurer withdrawals
- some insurers have withdrawn from the market or have reduced
their capacity/schemes/products due to the high losses and unsustainable
low prices.
4.7 Uninsured driving - A £500
million annual cost
4.8 Fraudulent claims -
staged accidents and fraudulent misrepresentation have increased
rapidly.
5. The impact on young people of the high
costs of motor insurance?
5.1 Young people represent the highest
proportion of uninsured drivers in the UK with 20% of the drivers
aged 17-20 expected of being uninsured. Insurance brokers are
developing new products like the GPS telematics systems that charge
a higher rate under certain circumstances per mile to encourage
risk management with young drivers, eg there is a greater risk
of younger drivers having an accident in an evening and therefore
the rate per mile is higher, this should hopefully discourage
younger drivers from driving at the most dangerous times and rewarding
them with a lower premium.
5.2 The average claim for a 17-19 year old male
is £3,433 compared to £1,380 for an over 50 year old
male. The AA also say that the under 21 male is ten times more
likely to have an accident than the over 35's. Therefore it is
plain to see why the premiums are higher for younger drivers although
we believe that circumstances could be greatly improved with revision
of the driving test, improvements to pass plus and the introduction
of telematics.
5.3 It is important to note that there is
NOT a market failure for younger drivers as there are many insurance
brokers who specialise in young driver motor insurance, it
is simply a case that the young drivers need to be signposted
to a suitable provider rather than be rejected by comparison sites
or direct insurers and left without knowledge of where to access
an appropriate broker.
6. 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?
6.1 Motor insurance premiums are massively influenced
by the effects of road accidents, insurance fraud, legal costs
and the number of uninsured drivers. These elements make up the
main costs of claims to the insurance industry and if tackled
by Government could relieve the current situation.
7. 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
7.1 The rise of the cost of motor insurance was
inevitable because of the issues outlined in our report above.
A recent statement by Deloitte does state that if motor insurers
are successful at increasing premiums whilst maintaining their
customer base they could return to profitably as early as 2011
and therefore the rise in premiums should slow dramatically.
7.2 However, many insurers are failing to maintain
their customer base as clients seek cheaper alternatives when
they receive their increased renewal and they avoid being caught
in any dual pricing situation. There are many things that the
Government can do to help:
1. Introduce Continuous Insurance Enforcement
(CIE) to reduce the cost of uninsured driving.
2. Introducing signposting regulations in the
Equality Act in order to Signpost people to the most appropriate
insurance provider where they can find competitive cover.
3. Regulate Comparison sites to the appropriate
standard.
4. Review the Pass Plus system.
5. Review the driving test.
6. Implement many of Lord Justice Jackson's recommendations.
7. Give an IPT "holiday" on motor business.
8. Provide the insurance industry access to DVLA
driver licence records to reduce fraud.
7.3 Full details of our reasons for these eight
points are contained in the text of this report.
8. Conclusion
8.1 Renewal increases are often due to the practice
of dual pricing (where new business is a cheaper rate than renewals)
but customers can still use an insurance broker to find them a
competitive quotation which we confidently believe would minimise
the AA's 40% reported rise. We hope the Transport Select Committee
can give full consideration to our eight recommendations above
and particularly the signposting solution that we can help with
as there is no cost to Government or the consumer and is a win
win for everybody and should help motorists with standard or non
standard records access suitable and competitive motor insurance.
November 2010
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