HC 591 The cost of motor insurance

Memorandum from Confused.com (CMI 14)

1. Background

1.1. The submission below is submitted on behalf of Confused.com.

1.2. Confused.com was the first online price comparison site for motor insurance launched in 2002. A subsidiary of Admiral Group plc it has provided over 24.5 million motor insurance quotes to 9.2 million customers in 2009. Confused.com is not a provider of motor insurance, but acts as an acquisition channel for its ‘partners’ (insurance providers whose policies are available to purchase via Confused.com).

1.3. The views represented here are of Confused.com comparison site and not the Admiral Group as a whole. Confused.com believes it has a dual role in the motor insurance industry: representing customers and acting in their best interests to provide insurance at the best price for their needs and circumstances. In addition, Confused.com is committed to working with its partners to ensure a successful, strong and sustainable insurance model which meets customers’ needs whilst delivering its objectives.

2. The submission has been broken down into four areas as requested in the call for evidence. Further detail or clarification is available on request where required.

3. The reasons behind recent increases in the cost of motor insurance

3.1. Premium inflation before 2010 has remained flat for more than 3 years.

3.2. Claims costs however have been escalating year on year .

3.3. The rise of comparison sites has served to make the whole market of motor insurance prices more visible to the customer. Whereas previously customers had to commit time to ringing around a lot of individual insurance providers or trust their current insurer to give them the best deal, they are now able to compare a vast amount of providers in one place in a short amount of time. This increased competition has created great value to the customer.

3.4. Comparison has relaxed barriers to entry of new providers to the market. It is easier than ever to enter the motor insurance market and instantly have access to large amounts of quotes through comparison sites. This increased competition has also been a factor in keeping the consumer costs of car insurance down.

3.5. Factors such as increasing costs of claims , more injury payouts (where more drivers are making claims for injuries that they may previously have not claimed for) and increasing fraud (falsifying quote information in order to lower their insurance premiums and the rise in fraudulent claims) have created a situation where many providers are operating at an underwriting loss.

3.5.1. The impact of fraud is significant , whether large- scale operations or simply embellishing personal injury for compensatio n. The National Fraud A uthority suggest s that dishonest insurance claims cost around £2 billion a year and Cash-for-crash hotspots have been named in Birmingham, Liverpool, Blackburn, Manchester and Leeds.

3.6. Due to the financial crisis and the extremely low interest rates we are now experiencing, insurance providers have lost significant revenue from investing their premium reserves in the markets.

3.7. U ninsured drivers are also causing prices to increase . According to the M otor I nsurance B ureau (MIB) they are costing the insurance industry around £500 million a year. Covering the cost of uninsured drivers adds on average around £30 to every motorist’s policy .

3.8. In summary, on the whole, insurance providers have not been increasing their premiums, however at the same time their costs have been going up. Resulting in the situation where on average the insurance providers are currently paying out £1.23 on claims and expenses for every £1 they earn in motor insurance premiums, a unsustainable model.

3.9. The result of these circumstances has led to the recent significant premium rises, as insurance providers have reacted strongly to move towards a profitable model.

4. The consequences of increased insurance premiums are as follows:

4.1. Increased uninsured drivers. MIB estimate that there are currently 3.6 million uninsured cars in the UK at present. The risk is that people will be priced out of the market when it comes to insurance and gamble with cover.

4.2. Increased Underinsurance – High premiums will force drivers to reduce cover. They will likely either reduce their insurance cover to Third party only policies or alternatively reduce the amount of ancillary insurance products they have with their motor insurance (e.g. legal cover, courtesy cars and breakdown cover) in an attempt to mitigate prices rises and save money.

4.3. An increase in fraud, via cash-for-crash large scale undertakings and in smaller ways (like non-disclosures to get a better price), are likely. Inflated claims will put more pressure on insurance providers’ profit margins and will also lead to more people having policies cancelled for deception in the event they are caught, leading to a further increase in uninsured drivers.

5. The impact on young people of the high costs of motor insurance.

(Figure 1.1 – Source EMB Confused.com)

5.1. Young people suffer more than any other age group when it comes to high insurance premiums. Young drivers have not only historically suffered high insurance premiums; they’ve also been hit hard by the recent increases in premiums by insurance providers (see table above).   On average young drivers pay far more than any other age group throughout the motor insurance industry. Males also suffer considerably more than their female counterparts. (Source - EMB Q2 2010).

5.2. There are several reasons why the young are particularly affected by high insurance premiums, including:

5.2.1. Make larger claims – Our research shows that young drivers make larger claims than other drivers, despite driving smaller or lower costs vehicles (see table below).

(Figure 1.2 – Source Confused.com)

5.2.2. Suffer higher claims inflation – Claims inflation for young drivers is increasing at a faster rate than average. Table above shows that both male and female claims costs have rising above the average during 2008.

5.2.3. Typically young drivers are the most inexperienced –Experience is key rating component of motor insurance and inexperience results in higher premiums overall.

5.2.4. High costs of finance – Due to higher premiums many young drivers have to pay for their insurance by monthly instalments, rather than one upfront payment. 

5.3. The impacts of high premiums for young drivers are:

5.3.1. High premiums will encourage uninsured driving – Higher premiums make insurance less affordable, especially for the young who have lower disposable incomes.  This in turn increases the likelihood of uninsured driving due to the fact they cannot afford to legally drive. 

5.3.2. Under insurance – Due to high premiums young drivers are more likely to strip out cover they see as unnecessary.  Legal cover, courtesy cars and comprehensive cover might be sacrificed to reduce the burden of insurance and result in drivers being underinsured for their personal circumstances.  Whilst this might make insurance more affordable in the mean time it will impact them more heavily when a claim is made.

5.3.3. Fronting – Fronting is already a major problem in the industry, especially with young drivers.  The probability of fronting a policy will increase as premiums remain higher than average.

5.3.4. Fraud – Insurance pricing is based on an application form completed by the customer with "utmost good faith" that the information provided is correct.  Higher costs of insurance might encourage drivers to manipulate their information or lie on their insurance application forms to obtain cheaper insurance. They may also exaggerate claim costs & bodily injury during a claim

6. Motor insurance is influenced by the prevalence of road accidents, insurance fraud, legal costs and the number of uninsured drivers in the following ways:

6.1. Road Traffic Accidents - Despite the rise in registered vehicles, the number of accidents & people killed or seriously injured has decreased in recent years (see figure 1.3 below). The fact that premiums haven’t decreased leads us to the conclusion that claims frequency doesn’t necessarily result in increased premiums.

(Figure 1.4 – Source Department of Transport via Data monitor)

Conversely average claim costs have risen significantly during the same time period suggesting that the cost of claims affect insurance premiums more (see figure 1.4 below). According to the ABI medical inflation is the main driver of this increase, especially in the case of bodily injury claims.  The average cost of a bodily injury claim far exceeds all other claim types and results in significantly higher outgoings on behalf of the insurance provider (see figure 1.4)

(Source – ABI via Data Monitor)

Finally the increased number of high-value claims has arisen as a result of the greater involvement of third-party management costs such as credit hire organizations and claims management companies.

6.2. Insurance fraud - More prevalent when premiums are high or in times of financial hardship and economic downturn. As expected, the number of fraudulent incidents increased during the recession as cash-strapped individuals sought to make money from insurers. The most high profile cases of fraud are ‘cash for crash’ scams. Another type of fraud is ‘fronting’ and usually this occurs when a parent declare themselves as the main driver despite one of their children being the primary car user. The Motor Insurers’ Bureau (MIB) found that two thirds of drivers in fact do not even understand what it means to ‘front’.

Undetected fraud is estimated to increase the cost of an average annual individual policy by around £44. (Source Insurance Fraud Bureau)

6.3. Uninsured Driving - Like fraud uninsured driving increases in times of financial hardship or economic decline. Uninsured driving is typically prevalent in young drivers, with drivers under 26 being 11 times more likely to have an IN10 Conviction in the last 5 years than over 60’s. (Source: Confused.com)

7. Public policy implications of the rise in the cost of motor insurance and steps the Government might take in response to them are as follows:

7.1. More education and support for young drivers. Making driving tests harder and more relevant to current driving and revamping the pass plus scheme could decrease claims, thus decreasing the costs associated with claims, allowing the price of policies to fall.

7.1.1. With 15% of the drivers causing 31% of all accidents and 40% of all claims cost, schemes to educate new drivers and provide them with better experience can only help to bring this down.

7.1.2. The pass plus scheme has started to become less of a desired qualification with some insurers as they don’t see the benefit in lowered risk. Drivers are not getting the benefit of reduced premiums with this qualification. Is it time to re-assess this scheme and improve to make it an attractive option for drivers and insurers alike.

7.2. GPRS technology for younger drivers would help keep accidents down and allow insurance companies to give lower premiums to adopters. Cover Box and green Road, to name two have developed technology to track the driving styles and habits of drivers. They apply these schemes with insurers to provide a lower risk . If the driver is driving adversely then the premiums go up. There is a cost to fitting the technology to vehicles, but by supporting these schemes for younger drivers, we would be likely to see fewer accidents, more responsible driving and as a result lower premiums for these individuals.

7.3. Higher deterrents for uninsured drivers would also have a positive impact on policy prices.

7.3.1. The deterrent for driving without insurance is at maximum a fine of £1,000, more commonly those caught are penalised for £200-£300 (in 2008 average fine dropped from GBP224 to GBP185*). Where the cost of the penalty remains significantly cheaper than the cost of the policy the incentive to drive legally is diminished.

*Source http://www.prweb.com/releases/car/insurance/prweb1621854.htm

7.4. Facilitate insurers working with with the DVLA databases to cut down on Fraud. Having access to the DVLA databases for convictions and licence types will remove the temptation for fraud (because information will be provided from an official source) and allow insurers to accurately represent the drivers conviction history and the customers risk more accurately in the prices they are offered.

8. In summary, Confused.com believes the three biggest contributing factors to the rise in insurance fraud which can be proactively managed are:

8.1. Instances of accidents and high claims amongst young people. Young people aged 17-25 account for 31% of accidents which represents 40% of total claim cost. Reducing the number of accidents further and decreasing the average claim would have a positive effect on insurance prices.

8.2. Put further challenges in place to combat uninsured drivers, making the penalty greater than the cost of insurance, encouraging young people to take insurance in the first place and reducing the cost for honest motorists

8.3. Improve data sharing between insurers and groups such as the DVLA to reduce instances of fraud and to create an industry solution to the new model by which motor insurance is purchased.

November 2010