The cost of motor insurance

Written evidence from Enterprise Rent-A-Car (CMI 29)

1. Overview

This paper has been prepared by Enterprise Rent-A-Car as a submission to the Transport Select Committee’s inquiry into the cost of motor insurance. It illustrates the extent to which car insurance premiums have risen over the past twelve months, sets out some of the reasons for this increase, and offers a number of suggestions for further investigation by the committee.

2. Introduction to Enterprise Rent-A-Car

Enterprise Rent-A-Car was founded in 1957 and is an industry leading, multi-national company with approximately one million vehicles in its global rental fleet and an annual turnover of more than $12bn. In the UK its current rental fleet is approximately 48,000, which makes it the largest car rental company as well as the biggest purchaser of vehicles in the country. Enterprise employs 3,400 people in the UK across 340 offices and branches – more sites than any other rental company.

Enterprise began trading with the overriding business philosophy that "you take care of your customers and employees first, and profits will follow". Enterprise starts from the point where its relationship with clients is a partnership and the company will support the client with change management as well as capacity issues, whilst delivering outstanding customer service for our corporate and retail customers. Insurance replacement vehicles account for some 30-40% of our rentals. Our approach has been to work with insurers to provide a cost effective and customer focused service.

3. The rising cost of motor insurance

The cost of motor insurance has risen by an average of 40% over the last year. These figures indicate that the cost of car insurance has increased at its fastest rate since the AA started analysing the market. The price of the average comprehensive motor insurance policy has risen from £473 in the second quarter of 2009 to £650. The 17-20 year old male group has seen the biggest increase, with the cost of a comprehensive policy increasing by £284 to £2,879, while women in the same age range have seen their premiums go up by £147 to £1,490. Although some observers have speculated that the price rises may be starting to run out of steam, it is clear that this is part of a longer-term upward trend, as premiums rose by 10% in 2007 and 8% in 2008.

There are a number of explanations which have been offered for this drastic increase in the cost of insurance. Insurers claim that they are currently paying out more than they are taking in and the price rise over the past year is simply a correction in terms of premium costs. In March 2010 a survey by EMB, one of the world’s largest specialist non-life insurance and reinsurance actuarial consultancies, indicated that, for every £1 the retail motor industry receives in premiums, it has to pay out £1.20 in costs and claims. This is a knock-on effect from the rise in non-transparent and often poorly managed third party organisations, such as some accident management or Credit Hire Organisations (CHOs) who increasingly control the claims process (including repair costs and length) and in some cases, appoint third party specialists such as no-win, no-fee lawyers to maximize the cost of the claim via personal injury.

Industry trends suggest that where accident management and certain CHOs are used the cost of claims tends to increase. Moreover, the accident management industry is becoming involved in an ever increasing number of cases. Between 2002 and 2007 the proportion of third party accident claims that involved accident management companies or Credit Hire Organisations increased from 7% to 20%. [1]

4. The role of the accident management industry

CHOs work by providing access to repair services and replacement rental vehicles and managing or sourcing other justice provision services such as bodily injury for not-at-fault drivers following an accident. They reclaim their outlay by charging the at-fault driver’s insurance provider a higher cost for the services incurred (repair, replacement vehicle). Where they do not manage BI claims themselves, typically these will be farmed to lawyers for a referral fee of often up to £1000. It is obviously in the interest of the lawyer to then convert that claim and recover compensation for the driver and costs. If the CHO fails to recover the costs from the at-fault driver’s insurance company, they may then look to charge the not-at-fault driver. This has led to a number of high-profile court cases after the at-fault driver’s insurance company has refused to foot the bill on the grounds that they have been excessive.

The services offered by the Credit Hire Operators are legal entitlements of the non-fault driver, so by virtue, are inherently good. However, the industry lacks a degree of regulation to control some of the processes and practices that certain accident management and CHOs adopt. Typically, these practices can be extremely inefficient and through manipulation of repairs (sometimes through bodyshop ownership or ‘agreements’) can lead to vastly elongated repair times and thus replacement car hire periods. This has a knock on effect of pushing up the cost of insurance premiums. A large volume buyer is usually able to purchase rental cars on a per day basis at up to 50% less than through a CHO. The average hire time is also higher when a claim is being handled by a CHO. The average rental is around 25 days through a CHO, but where an insurance company has direct control of the claims process and is organising the rental directly, this can fall to 13 to 14 days. [2] Certain practices came to light earlier this year when a small spate of whistle-blowing uncovered some of the specific practices adopted by certain companies to lengthen repair times and increase claims costs.

Key to the growth of the accident management industry has been the "race to the client". The accident management industry captures claims by paying referral fees to insurance companies, garages or other sources, who recommend their service to not-at-fault drivers. Often referral sources will refer victims of a road collision onto an accident management company before their insurance provider is aware there has been an accident.

CHOs do provide a useful service, meeting the changing needs of the consumer and their need for personal mobility. As such Enterprise has made use of credit hire as part of our service to customers, but this has been largely at the request of insurance providers with transparency over prices and the length of hire and professionalism at the heart of our approach. In cases where the claims involving credit hire are not effectively managed, then the cost of claims can spiral out of control and thus play a big role in pushing up insurance premiums.

5. Legal liability and the "compensation culture"

As mentioned, in some cases CHOs also refer their clients to personal injury lawyers, for which they receive referral fees. This helps push up the cost of claims settlements. Association of British Insurers figures suggest that the average cost per motor bodily injury claim in 2008 was £3,512 - an increase in16% over the previous year. Combine this with a 13.3% increase in incidents involving personal injury claims between 2007 and 2009 and the real cost becomes more apparent. More recent analysis by the ABI of 50,000 low value road accident personal injury claims suggests a £40 increase in premiums per average policy as a result of legal fees and costs.

This increase in personal injury claims has been a major factor in driving up motor insurance premiums. The proliferation of "no win, no fee" solicitors as part of the accident management portfolio of services has increased compensation claims despite the fact that the number of road accidents has remained broadly the same in recent years. Some companies guarantee a 40% conversation (win rate) and will pay up to £1,000 for a personal injury referral. By nature, this encourages an aggressive sell to the non-fault claimant to help meet the 40% target. Lord Young’s recent review into health and safety legislation found that there is a growing burden on businesses by insurance programmes that entail expensive premiums, and that this has been mainly driven by frivolous claims and the growth in conditional fee agreements over the last few years.

6. The role of insurance providers

The growth of the accident management industry is in some way a response to a need in the market for suitable services targeted at non-fault drivers who have been involved in a crash. Historically, many insurance companies did not offer their customers an effective repair and replacement car service or relevant access to justice for legitimate claims. CHOs spotted this gap in the market and saw an opportunity to give their clients what they were entitled to after an accident, taking control of the claims away from the insurer. For non-fault claims, the insurers saw this service as valuable as they were able to pass on responsibility for the claim to a third party and generate revenue from the referral. However, at that time, no-one could have foretold the impact this would have on at-fault claims costs.

7. Theft, fraud and "crash for cash" claims

The most common and costly form of insurance claims fraud is "opportunistic retail fraud". This is where individuals exaggerate or inflate genuine claims to increase the value of a payout, and is often factored into loss ratio calculations. However, there is evidence to suggest that the past few years have seen a big rise in organised scams, where criminal gangs work to systematically defraud insurers. There are frequently reported examples of "crash for cash" cases where accidents are staged, usually at roundabouts, by drivers suddenly braking, causing the car behind to crash into them. In October 2009, a man was sentenced to four and a half years in prison for deliberately causing at least 93 car crashes in three years, costing insurers around £17,000 on each occasion. [3] Figures from the Insurance Fraud Bureau estimate that around 30,000 accidents were staged last year, costing the industry £350m and adding £44 to the premiums of every driver in the country. [4]

Another phenomenon which has emerged in recent years has been that of organised criminal gangs, particularly with connections to Eastern Europe, stealing cars in the UK as part of the lucrative illegal trade in luxury vehicles. A recent report from Europol noted that "the incidence of organised international vehicle trafficking is on the increase", and that "no other type of criminal activity is as lucrative for such minimal risk". A high value car can net around £15,000 on the black market, with half the cars stolen in the EU trafficked to neighbouring countries, generating around £6.75bn in annual revenues.

While Ireland and Holland have been the main focus of such activity in recent years, there has been a number of reports, particularly in Yorkshire and Essex. In July 2010, five Lithuanians were jailed for their part in a £750,000 stolen car smuggling ring. [5]

8. Uninsured drivers

In addition to this, insurance premiums are being pushed up by the growing number of uninsured drivers. A 2010 study by Kwik-Fit showed that there could be some 2.6 million people who drive without an MOT. [6] Around 1.6 million people are believed to be driving without insurance. Uninsured drivers injure 23,000 people and kill 160 each year with a total cost to honest motorists of some £500m through a ‘surcharge’ of a further £30 per policy. [7]

Uninsured drivers are far more likely to be involved in road traffic accidents, fail to follow traffic signs, or cause injury or damage to other people’s vehicles or property. The increased cost of motor insurance creates a vicious circle, as higher prices temp more drivers to feel they can get away without insurance, which pushes premiums up even higher.

9. Insurance Premium Tax

Although there has been some speculation that the worst of the insurance price increases may now be behind us, there are a number of measures on the horizon which mean that cost pressures on motorists are likely to remain for the foreseeable future. The forthcoming increase in Insurance Premium Tax from 5% to 6% in January 2011 will mean that drivers will be paying £18 per year on a £300 policy. With the increase in VAT from 17.5% to 20%, and a recent 1p increase in fuel duty, the IPT hike will hit drivers at a particularly difficult time in the economic cycle. Enterprise believes that the recent price increases are part of a systemic imbalance in the insurance industry which has been driven by the "race to the client" challenge from CHOs and fuelled by the perceived "compensation culture" highlighted in the Young report.

10. Recommendations to the Transport Select Committee

In order to meet the challenge of rising insurance premiums and ensure that car travel remains an affordable and viable means of transport in these economically challenging times, Enterprise recommends that the Transport Select Committee investigate the following areas:-

a) Mandatory reporting of any accident to the driver’s own insurance company

One of the reasons costs get out of control and disputes arise during insurance claims is that CHOs capture and control the claims process and associated costs. Members of the Transport Select Committee should consider the benefits of adopting a more robust regulatory approach to case management through an amendment to the Road Traffic Act to require mandatory reporting of accidents to their insurance providers, even in cases where the at-fault driver has admitted liability.

b) Review the role of referral fees in the accident management industry

The payment of referral fees by the accident management industry has encouraged some of the behavioural challenges we see today. Referral fees are driven by competitive forces. As the CHOs or other participating organisations try to ‘out-compete’ on referral fees paid, the cost of these increases needs to be bourn in the claims costs charged to the at fault insurer. However, crash victims are often not in a position to make an informed choice about what service is right for them. All too often, CHOs or other accident management companies are sold policy-holder details through a range of referral sources. This can be interpreted by the policy-holders as a belief that the organisation is working for and on behalf of the insurance company when, in actual fact, they are ring-fencing the non-fault claimant and looking to maximise the value of the claim.

In addition to a requirement that all accidents should be reported to a driver’s insurance provider, the committee should examine the practice of referral fees paid to breakdown companies, scrap yards, emergency services or other referral sources by the accident management industry. In particular, the payment of referral fees for personal injury opportunities has helped to fuel a circle of litigation that has pushed up insurance costs. Referral fees in themselves aren’t a bad thing but can encourage bad behavior, and the process needs to be more customer-centric. Enterprise operates in this market, but our approach is designed to challenge behavior and ensure that claims are managed in a transparent manner. We believe the Transport Select Committee should consider the benefits of a cap on referral fees as a means of keeping claims under control and reducing their impact on insurance premiums, as well as ensuring that sellers look at service as well as revenue.

c) Limits on the amount of compensation that can be awarded under "no win, no fee" arrangements

The Young Review noted that the proliferation of "no win, no fee" services has given rise to the perception that there is no financial risk to starting litigation, and indeed, some individuals are given financial enticements to make claims by CHOs, who are in turn paid referral fees by solicitors. These costs must all be met by insurance companies, and passed onto drivers through higher premiums. Enterprise suggests that the Transport Select Committee considers increasing the upper threshold of £10,000 for personal injury claims for road traffic accidents that can be settled on a fixed cost basis.

Of particular concern are guarantees by some solicitors that they can convert 40% of personal injury referrals into compensation payments. Several years ago this figure was around 10%, demonstrating the extent to which the compensation culture has contributed to the financial burden borne by the insurance providers.

The Jackson Review proposed a number of measures which would place restrictions on the amount of compensation that could be awarded under "no win, no fee" cases. Any reform of legal liability law should give claimants a financial interest in the level of costs being incurred under their name, while still allowing claimant solicitors to make a profit.

d) Action against uninsured drivers

A study by the Motor Insurance Bureau suggests that 10% of drivers in the 18-34 age range do not know that car insurance is a legal requirement, and around 900,000 drivers under the age of 30 are currently driving without any insurance. The committee should investigate ways in which drivers can be made more aware of their obligations and responsibility to themselves and other drivers. While the Road Safety Act 2006 makes provision for harsher sentences for uninsured drivers who injure or kill others, the committee should consider whether the maximum fine of £5,000 and six to eight penalty points should be increased to reflect the seriousness of the offence and reduce the temptation for drivers to go without motor insurance.

e) Tougher action against ‘crash for cash’ scams

The committee should look at ways to clamp down on the growing number of insurance fraud and "crash for cash" schemes. The Fraud Act 2006 defines insurance fraud as a crime punishable by up to ten years in prison, a fine, or both. There are also powers to prosecute the perpetrators of such cases through laws against reckless and dangerous driving. The committee should consider whether the police are aware of the full range of powers available to them to tackle crash for cash schemes, and what additional measures and resources might be required to reduce this fraudulent activity.

12. Endnotes