HC 591 The cost of motor insurance

Memorandum from RBS Insurance (CMI 12)

RBS Insurance is the second largest general insurer in the UK and is wholly owned by the Royal Bank of Scotland Group. Headquartered in Bromley , Kent , it has operations in the UK , Germany and Italy . RBS Insurance continues to be the largest motor insurer in the UK with a 22 per cent market share. In 2009 RBS Insurance became the UK ’s largest home insurer .

RBS Insurance provides a wide range of general insurance products to consumers through a number of well known brands including; Direct Line, Churchill and Privilege. It also provides insurance services for third party brands, through its UKI Partnerships division.  In the commercial sector, its NIG and Direct Line for Business operations provide insurance products for businesses .

In addition to insurance services, RBS Insurance continues to provide support and reassurance to millions of UK motorists through its Green Flag breakdown recovery service and TRACKER stolen vehicle recovery and telematics business.

Executive Summary

The recent steep rise in premiums across the motor insurance industry is a huge cause for concern for RBS I nsurance and one our staff are confronted with every day. It is important that we understand exactly why these rises have occurred and our investigations have shown it is a culmination of many factors. W e hope this evidence will give the Transport Select Committee an ins ight into the causes and effect s our industry faces. What follows are short summaries of the di fferent causes that lead to increases in premiums. In most cases, these have been fuelled by negative cultural change s in the UK and have become a per fect storm for insuring the modern driver. If there was one single factor that has lead to the rise in premiums , it is the rising compensation culture that this country has witnessed in the last few years. This is an issue that needs immediate attention and the effect of doing so will be positively felt by the consumer.

1.0 The reasons and consequences of recent increases in the cost of motor insurance

T he EMB ’s annual analysis of the financial returns made by insurers to the Financial Services Authority, stated for every £1 motor insurers received in premium s , they paid out £1.22 in claims . This increase in claims costs is the key factor in the increased cost of motor insurance. The single biggest cont ributing factor to these claims is the increase in personal injury claims and the associated costs.

Personal injury claims

The continued increase in the number of personal injury claims is, in RBS Insurance’s view, the overwhelming factor in the rising cost of motor insurance premiums. This is despite the fact that the frequency of actual accidents has not increased. The now firmly-established ‘ compensatio n culture’ in the UK has fuelled the desire for people to seek compensation for accidents. This has been exacerbated further by the prolific marketing of the services of no-win no-fee lawyers and claims management companies.

RBS Insurance is firmly supportive of those injured in accidents being quickly and rightfully compensated and, as such, commends the recent implementation of the Ministry of Justice Reforms to make the process for smaller claims simpler and quicker. Currently for every £1 paid in compensation for smaller injury claims an additional 87 pence is paid in lawyers fe es. The ABI has stated that £41 from every motor insurance policy goes to the legal profession.

Fraud: The onset of "cash for crash" fraud is another worrying development for the industry. There is a rising trend in accidents being staged and the driver (and passengers) claiming for injuries. The ABI estimates the cost of motor insurance fraud is £410million per annum . RBS Insuranc e recently surveyed 200 GP s and found they are currently rejecting as fake nearly one in five patients claiming to have whiplash injuries .

Case Study : A recent case saw a genuine accident involving a 31 seater bus generate 34 injury claims – police investigations found that one passenger who worked for an accident management company generated £17k in referral fees by referring all his fellow passengers to solicitors. Almost all the claims were found to be for injuries that did not exist.

Recent industry analysis has shown t hat since the proliferation of claims management c ompanies , the cost of settling i njury cl aims has increased by around 20 per cent per year and the frequenc y has increased by a further 10 per cent per year. It is no surprise , therefore , that injury claims now make up the majority of our claims spend, up from under a quarter only two decades ago .

The chart below is taken from our own data. It shows how the proportion o f total claims cost that relate to injury pa yments has grown over the last two decades.

Another factor that has increased insurers’ claims costs , and in turn impacted the cost of motor insurance premiums , is an increase in personal injury settlements in the form of Periodical Payment Orders (PPO). Under the Courts Act 2003, the courts have the power to order the settlement of a claim, wholly or in part , by means of a PPO, whereby the clai mant receives some or all of their damages via regular payments from the insurer. Under a traditional lump sum settlement, the claimant would invest their money in order to meet future losses, such as loss of earnings or care costs. Under a PPO, the investment and mortality risk is transferred to the insurer - this means that when the clamant dies, the regular payments cease. These payments are index linked to care costs and in the current low investment environment have greater cost implications to insurers.

Whilst the upward trend in personal injury claims is a major reason for the increase d cost of motor insurance , other contributing factors are:

The proliferation of penalty points

The proliferation of penalty points on drivers’ licences has also had an impact on the cost of insurance premiums. Our own data , as well as separately commission ed research , h as highlighted approximately 16 per cent of all drivers have (or have informed us of having) penalty points on their licence.

Our own statistics suggest a driver with one conviction is 69 per cent more likely to claim than a driver with no convictions. This increase s incrementally t he more convictions a driver has :

· A driver who has two offences on their licence is 38 per cent more likely to claim than a driver with one offence.

· A driver with 3 offences is 19 per cent more likely to claim than driver with two. This greater risk is priced accordingly.

N.B. Other factors which impact motor insurance costs are uninsured drivers and fraud which we refer to later within this document .

2.0 2.0 The impact on young people of the high costs of motor insurance

RBS Insurance believes that it is important to understand why young drivers (defined as typically under 25 years old) do, on average, have higher premiums. A whole range of factors affect the amount you pay for your car insurance policy , including : age, vehicle, mileage, type of use, gender, occupation, postcode, claims history and any driving convictions or penalty points. It is a combination of these factors that determines the insurance risk, and hence the premium a driver pays .

When it comes to young, inexperienced drivers , our own data suggests they are twice as likely to make a claim, and five times more likely to make a claim that involves an element of injury than an older driver . Young drivers are 10 times more likely to make a claim involving severe personal injury . These statistics highlight why insurance for younger drive rs tends to be significantly more expensive. I t is worth noting that this is not based around the value of the vehicle that they drive , but rather the amount of damage they can do with that vehicle to themselves and other people.

Fronting
One clear consequence of the higher premiums younger people pay is the issue of ‘fronting’. ‘Fronting’ is where the main driver of the vehicle is insured as the named driver to reduce the cost of their insurance. This typically results in younger drivers naming their parents as the policyholder and themselves as a named driver. This method of reducing the cost of a motor insurance policy is fraudulent . T he conseque nces could be grave , ranging from an additi onal premium being required ,  to  the voiding of a policy (and therefore non-payment of the claim) ,  as well as the policyhol der being added to the financial industry’s f raud database (CIFAS).

Another potential consequence of high premiums for young drivers is them opting to drive uninsured. The MIB estimates that around one in five uninsured drivers are under the age of 20.

There are, however, several ways for younger drivers to reduce the cost of their motor insurance. Choosing a car that is in a lower insurance group can reduce premiums by up to 30 per cent – even within the small car bracket. Young drivers who undertake an advanced driving course such as Pass Plus are also eligible for discounts with RBS Insurance and other insurers. We are continually looking for ways to make the roads safer and are working with the DSA to help to shape the future of driver training . W e recognise that Pass Plus would be a more effective differentiator of risk if it contained a test at the end.

Direct Line was the first insurer to enable named drivers to accrue t heir own No Clams Discount. Y oung drivers, wit h no previous insurance history , can build up a discount that can be used when they wish to take out an insurance policy of their own.

RBS Insurance is committed to promoting road safety. It has a long standing relationship with Brake, the road safety charity and in 2009 released its ‘Ready to Drive’ report highlighting its recommendations to promote safer driving for younger motorists.

3.0 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

Road accidents

The changing cost of repairing a vehicle after an accident is not a significant factor in recent increases in i nsurance premium s . The increases here have been offset by the downward frequency of road accidents , which Government st atistics reveal have fallen by three per cent in the last year. The most significant factor is the huge rise in claims made for personal injury after a road traffic accident ( RTA). I n fact , the Compensation R ecover y Unit has recorded an increase of 27.5 per cent in the number of cases they register for personal injuries after a RTA over the past two years .

Insurance fraud

The Insurance Fraud Bureau states that the cost of insurance fraud to honest policy holders is an additional £44 on every insurance policy. Our own research suggests one in ten people who has claimed for personal injury after a RTA has either lied about or exaggerated their injuries. The increased cost in insurance premiums may potentially increase the number of people who wish to commit fraud, to recoup the money they paid for their policy .

Legal costs

There is a substantial correlation between when ‘no win no fee’ lawyers and claims management companies bega n actively marketing their services and increases in fraudulent claims for injury.

The ac tuarial p rofession recently highlighted within its GIRO presentation the direct cor relation between the increase in the number of cla ims management companies and growth of personal injury claims.

This is not to suggest, though, that lawyers and claims management companies have encouraged fraud. However, by commoditising the legal process and creating the perception that everybody in an accident – regardless of the fundamental presence of injury – is due compensation, they have provided the fuel for the creation of a right to compensation as a ‘social norm’. For the increasingly significant minority who subscribe to the view that ‘ everybody is doing it anyway ’ , the likelihood of an attempt to commit fraud increases.

As Lord Young’s recent report denoted, there is considerable evidence of the disproportionate nature of damages in relation to claimants’ costs.

Uninsured drivers

The Motor Insurance Bureau states that of the 34 million vehicles on UK roads, approximately 1.5 million are uninsured . U ninsured drivers injure 23,000 people and kill 160 each year , with a total cost to honest motorists of £500 million , paid for throu gh their insurance premiums. This i s estimated to cost an additional £33 on each and every law-abiding motorist’s insurance premium.

RBS Insurance has expressed its concerns on the level of fines within our response to the DFT’s consultation paper on uninsured drivers. A n uninsured driver could be fined as little as £50 under the current proposal which , when you compare that to other fines such as £1000 for not having a TV licence, or £5000 for graffiti , is not a big enough deterrent.

The increase in motor insurance premiums also puts pressure on the affordability of motor insurance for some people, and may tempt them to drive uninsured.

4.0 Whether there a re public policy implications in the rise in the cost of motor insurance and, if so, what steps the Government might take in response to them.

RBS Insurance strongly believes that the Government should implement, without delay, the full recommendations of Lord Young ’s review on health and safety laws and compensation culture.

RBS Insurance draws particular attention to Lord Young’s recommendations to:

· i ntroduce a simplified claims procedure for personal injury claims similar to that for road traffic accidents under £10,000 on a fixed costs basis

· r estrict the operation of referral agencies and personal injury lawyers and control the volume and type of advertising.

RBS Insurance strongly believes that the Government should implement, without delay, the full recommendations of the Lord Justice Jackson’s Review of Civil Litigation Costs. RBS I nsurance draws particular attention to Lord Justice Jackson’s recommendations to:

· abolish the recoverability of both success fees and ‘ After The Event ’ ( ATE ) insurance premiums;

· and assist claimants to meet the cost of the success fees for which they would now be liable; an increase of 10 per cent in the level of general damages for personal injury, defa mation and other tort claims; a regime of qualified one way costs shifting in specified proceedings, including personal injury and defamation.

An additional policy consideration that RBS Insurance would strongly urge the Government to look at is the use of and access to CCTV in public places. Allowing insurers access to CCTV at crash sites would speed up the process of compensating those who were injured in the accident.

November 2010