Supplementary evidence from Duncan Anderson,
Towers Watson[44]
(CMI 3a)
The submission by the CHO provides a supporting table,
sourced from the ABI. We cannot reconcile this table to our readily
available sources but also do not feel it necessary to understand
the table. The CHO states that during the period covered by the
table, the market showed relatively benign movements in total
average premium. Towers Watson would accept this conclusion but
might debate the actual numbers.
Measuring movements in insurance premiums is very
difficult for a number of reasons. Three areas where current private
car insurance premium indexes might not explain the whole market
trends are discussed below.
1. RENEWALS
Insurers, knowing more about renewing customers than
new customers, may well chose to encourage existing customers
to renew by moderating any significant increases they are applying
in their underlying structures (which may have been set to handle
new customers who may have poorer claims experience in their first
year compared to renewing customers' existing experience). One
major reason for insurers to manage their renewals in such away
is to avoid the need to incur acquisition costs to replace renewal
business with new business whose claims experience may be worse
and more variable. However, there is no "public" information
on the detail of insurer's actions with regard to renewals and
any moderations applied.
2. NATURAL AGING
Customers renewing their policy on the same basis
as the previous year are likely to see a decrease in premiums
(even if they have full NCD), assuming the insurer has not changed
its rating position. This is because the customers profile will
age e.g. the customer will be a year older, the car will be a
year older, the distance in years to any claims and convictions
increases. The underlying risk, and so the insurance premium which
reflects risk, will usually reduce.
3. SHOPPING AROUND
The customer's ability to shop around, especially
with the rise of comparison sites, has increased in recent years.
As a result customers may switch provider to a cheaper rate (or
negotiate with their current insurer to match a competitor's rate)
much more readily than in the past. In addition, customers may
chose to purchase from insurers that are not necessarily the cheapest
in the market since, for example, the insurer may have a good
brand, offer more coverage, include desirable "add ons"
for free.
It is difficult to find one measure that records
all aspects of market premium movement and, in addition, any attempt
at measuring market movements is likely to differ from someone
else's attempt. It does not mean that one or the other's (or both)
attempts are wrong - simply that the source data used and the
approach adopted will give rise to differences. This may be why
the respondents' widely accepted view of the market trends might
be questioned by the CHO submission.
It might be helpful to bring together some information
that supports the movements in the market that have been commented
on by most respondents. There are a wide variety of sources of
information available but we have attempted to comment on examples
from each broad area: Premium Movement Indexes, Government Data
and Insurers Commentary/Results presentations in the market.
Premium Movement Indexes
Both premium index measures commented on below, the
AA and the Confused.com/Towers Watson indexes, provide benchmark
movements for the lowest premiums available in the market place
based upon the source data available. They both use data related
to comparison sites which reflect the rating of the majority of
insurers in the market place. This does not mean that it reflects
all rating in the market place e.g. RBS has companies on comparison
sites but have significant products sold directly to customers.
AA British Insurance Premium Index
The AA index has traditionally focussed on the broker
market. Before the rise of direct writers and comparison sites
this information would be viewed by the market as the benchmark
to use for market movements. The AA recognised that Comparison
sites, now responsible for over 50% of new business in the Private
Car market, have altered market dynamics. For this reason, in
2010 they introduced an additional index that measures the market
movements seen on comparison sites.
For both the broker and comparison site indexes the
AA use a few thousand risk profiles to monitor market movements.
The AA last published index information for the third
quarter 2010:
| AA Broker Focus |
| |
| Year to 30 September 2010 | Comprehensive
| 39.9% |
| TPFT | 54.6%
|
| | |
| AA Comparison Sites |
| |
| Quarter to 30 September 2010 | Comprehensive
| 10.3% |
| TPFT | 9.2%
|
The broker focus annual increase is significant as is the in quarter
increase for comparison sites.
Confused.com/Towers Watson (formerly Confused.com/EMB) Index
This index uses the millions of quotes Confused.com receive monthly
to derive a view of market movements for the cheapest new business
premium in the market place. This is a fairly technical piece
of work that involves undertaking a statistical analysis of each
months quotes and applying the resulting model to a profile of
4 million risks that represents the whole market's mix of business.
| Annual Increase
|
| Year | Comprehensive
| TPFT |
| 2007 | -1.4% | 2.9%
|
| 2008 | 1.8% | 8.1%
|
| 2009 | 12.6% | 21.6%
|
| 2010 | 38.2% | 56.3%
|
This index records that the early years movements, that are available
for comparison in the CHO table, are relatively benign (Comprehensive
business forming over 90% of written private car business with
TPFT the majority of the rest).
In 2009 the index shows that some significant movements have applied.
The CHO table does not show such a high increase. Ignoring the
accuracy of the data in the table, we would expect that, given
the increase in 2009 were applied towards the end of 2009, that
the vast majority of new business policies written in the year
would not see that level of increase and so for the whole year
the increase indicated would be reduced significantly when measured
in aggregate. This dampening effect does not mean that significant
increases were not applied to the new business market in 2009,
only that the impact was towards the end of 2009. In the renewing
market, for reasons identified above (like insurer premium increase
moderation) the index could well be moderated. However, the underlying
trend for renewal business would still be to apply increases but
implemented over a longer times span than in the new business
market.
Government Data - CPI
The Consumer Prices Index (CPI) is the main domestic measure of
UK inflation for macroeconomic purposes. A consumer price index
(CPI) measures changes through time in the price level of consumer
goods and services purchased by households. The CPI actually consists
of a large number of sub indexes one of which is labelled "Transport
Insurance". Towers Watson believe that insurers supply premium
information for a small number of risks from which this index
is created.
The "Transport Insurance" sub index shows the following
annual increases
| Year | Annual Increases
|
| 2007 | 4.2% |
| 2008 | 1.7% |
| 2009 | 22.4% |
| 2010 | 32.2% |
Again, this index shows significant increases being applied in
the market place in the last two years.
As discussed earlier, each index may show different actual numbers
but what is more important is that the broad trend and levels
displayed and the consistency between them. It could be argued
that insurers could manipulate the CPI information and the AA
BIPI index. It could also be argued that these two indexes might
be distorted because of the small number of risks underpinning
them. However, the Towers Watson/Confused index is based on millions
of real customer quotes and openly available insurer premiums
for each of them.
Given that there could still be some debate around the indexes,
their nature and their foundation, it might be worth stating what
has been said in public by insurers about their actions within
the marketplace. These indications tend to be combination of narrative
and indicative increases and are only available at infrequent
points in time.
Insurers' Commentary
RBS Quarter 2 2010
"Total in-force policies have declined due to a reduction
in motor policies following significant re-pricing as well as
exiting less profitable partnership and broker business".
Zurich January 2010
"We have seen a 30% increase in bodily injury frequency with
a worsening trend throughout 2009. This, combined with high inflation,
has resulted in a 50% increase in the cost of covering bodily
injury losses in the last few years. With this trend showing no
signs of slowing down, we are taking decisive steps to lead the
market in driving the corrective rate action that the motor line
of business clearly needs. As a result we will move rates on our
broker business by as much as 20% in March to address this trend,
over and above the rating action we have already taken. As this
is an industry and distribution-wide issue, our colleagues in
the Direct channel are taking similar action on their book. However,
if the trends in bodily injury and related claims farming activity
continue even this may not be enough. As an escalating market
issue, we recognise that all insurers will be seeing this trend,
but by acting now, we can move quickly to provide our customers
with a sustainable level of long term pricing".
Aviva and RSA - August 2010 article
"Aviva, Britain's biggest insurer, said today it had imposed
'double-digit' increases in motor premiums over the past six months
while also increasing home insurance rates.
David McMillan, head of Aviva UK general insurance, said: "It
is not surprising that rates have continued to harden this year.
If you look at the underlying inflation in bodily injury claims
that we have had in the market for the last three or four years,
in many respects it is surprising rates didn't harden sooner."
He added: "There is no sign of a let-up in this inflation,
so I expect this market phenomenon to continue."
RSA, which owns the More Than insurance brand, has raised its
rates by 13% for motor policies. It said it "continues to
take action on rates as and when necessary"."
Insurer's results presentations
| RSA | Increases achieved in 2010 up to 30 September
| 18% |
| AXA Motor | Increases achieved in 2010 up to 30 June 2010
| 14% |
| Admiral | Increases achieved in 2010 up to 30 June 2010
| 14% |
| (Admiral says that this represents achieved increases of 22% in year up to 30 June 2010)
|
CONCLUSION
From each of the sources examined the broad message is:
Increases
are being applied in the UK private car market
This is a
more recent trend
The increases
are significant
Towers Watson hopes this note helps put the CHO commentary
into context and explains the widely presented view on private
car rating increases in the market place.
February 2011
44 Towers Watson has recently acquired EMB Consultancy
LLP, from which Duncan Anderson previously submitted evidence
to the Committee Back
| 
