HC 591 The cost of motor insurance
L loyd’s Market Association (LMA) (CMI 06)
About the LMA: This submission is provided by the Lloyd’s Mark et Association (LMA), which was formed in 2001, and represents all the businesses which underwrite insurance at Lloyd’s of London. Its members together constitute one of the world’s largest commercial insurance markets, bringing many billions of pounds of foreign exchange to London each year. Through the LMA, the interests of Lloyd’s Underwriters and Managing Agents are promoted wherever decisions are made that affect the market.
1.1 Summary: We welcome the opportunity to provide input into this important Inquiry.
The significant premium increases currently affecting UK motor insurance customers are the result of a cyclical upswing in price after more than a decade of losses. It is unfortunate for customers that long overdue increases have arrived en masse, rather than via steady annual uplifts over the past decade that would have better aided budgeting.
1.2 Extensive market losses (circa 20% in 2009 alone) have been caused by a mix of underlying factors. These include legitimate market effects such as low investment returns and the high costs of providing care to badly injured claimants, to dysfunctional effects, such as excessive/unnecessary credit hire costs, fraud and disproportionate legal costs in personal injury claims.
1.3 Whilst premiums have recently risen quickly, there is no direct market failure for customers, who can still choose a suitable product from a wide range of providers. In order to reduce premiums, the underlying risks and the underlying costs must be reduced.
1.4 There is a role for the Transport Select Committee and the Government to play in tackling unnecessary or excessive costs caused by dysfunctional market mechanisms.
1.5 Credit Hire: the current market mechanism that supports the role of credit hire operators
is badly flawed, as customers are encouraged to incur unnecessary/inflated costs without direct financial consequences, as the bill is usually settled by someone else’s insurer. Significant market reform, supported by legislation where required, may be the only way to remove this layer of inflated costs.
1.6 Legal costs: the Government should implement the Jackson Recommendations  (to reduce the costs of civil litigation) in full, and consider implementing Lord Young’s recommendations  . The cost of civil litigation is disproportionately high, referral fees paid by solicitors to acquire cases are excessive (and are recovered from insurers via costs), and After The Event insurance should be made unrecoverable.
1.7 Uninsured driving: there are unacceptably high economic and social costs of this illegal activity. Police enforcement using ANPR technology and the Motor Insurance Database, coupled with their powers to seize vehicles driven uninsured, have definitely made inroads into the problem. The Government should now press ahead with implementing Compulsory Insurance Enforcement, fully funded, in 2011 to improve prevention and tackle persistent offenders.
1.8 Fraud: The Government should consider two actions; better incentivising Police/CPS to take insurance fraud seriously and prosecute more fraudsters, and consider increasing court powers to strike out the entire claim of (3rd party) fraudsters that have exaggerated their claim.
1.9 Excessive Risks presented by inexperienced drivers: the current driver licensing regime does not adequately manage the excessive risks presented by inexperienced drivers; no minimum learning period, no restrictions on carriage of multiple passengers or night-time driving. Research has shown that a tougher licensing regime could lead to significant reductions in serious accidents involving young people.
Responses to Specific Committee Questions
2. The reasons for, and consequences of, recent increases in the cost of motor insurance
2.1 It has been widely reported in the press that UK motor insurance premiums have significantly increased over the last year. The AA Premium Index indicates that comprehensive motor insurance premiums generally increased by up to 33% between September 2009 and June 2010  , although there remains a wide degree of difference in pricing from one insurer to the next. There are a range of underlying factors causing these premium increases, which are a response to extensive losses experienced in the market over the last decade.
2.2 Some underlying factors are legitimate market dynamics:
- Low investment returns
- High (and super-inflationary) costs of providing care to seriously injured claimants
- The heavily-suppressed ability of insurers to increase premiums, caused by intense market competition, facilitated by the advent of aggregator websites
2.3 And some underlying factors are dysfunctional market dynamics:
- Inflated/unnecessary costs caused by credit hire
- The high frictional costs of settling personal injury claims
- Claims farming leading to inflated claimant numbers
- The costs of funding claims caused by uninsured drivers
- Insurance fraud
2.4 The cumulative effect of all the above factors, against background of relatively flat premium levels over the past decade, has caused the steady development of a ‘perfect storm’ for motor insurers in recent years, producing heavy losses and driving a sharp cyclical upswing in price over the past 9-12 months.
2.5 The motor market has been running at a loss for many years; the market has not made a net profit since 1994-1995, the only years of motor market-wide profit since the 1970s. Losses have escalated in recent years, and the UK motor insurance market collectively sustained a loss of circa 20% in 2009. At Lloyd’s, the largest motor syndicate (218 Equity Red Star), has recently reported worst-case expected losses of up to 57% for 2008, and up to 20% in 2009. KGM (syndicate 260) has reported expected losses of up to 38% in 2008, and up to 26% in 2009. Gross Written Premium remained virtually flat between 2002 and late 2009, despite sustained losses  .
Legitimate Market Dynamics
2.6 General trading conditions for motor insurers have been extremely challenging in recent years. Low investment returns have reduced income on earned premium to minimal levels, and intense market competition has severely squeezed profit margins. Motor insurers operate in an intensely competitive industry, selling a largely commoditised product. There are 50- 60 insurers  (and thousands of intermediaries), all competing for motor business in the marketplace.
2.7 The emergence of price comparison websites in recent years has further improved the market for customers, permitting fast and easy comparison and purchase of cover. This increased market efficiency has also created additional pressure on margins for insurers. NB We consider the above issues to be normal functions of a highly competitive marketplace, not public policy issues.
Dysfunctional Market Dynamics
2.8 Credit Hire: Over the past 10-15 years, credit hire firms have entered the motor claims market, offering replacement vehicles (on credit) to motorists whose vehicles have been damaged in an accident. In the event that the motorist successfully brings a claim against the party at fault, he can recover the costs of the car hire from the other party’s insurer.
2.9 An element of this process is legitimate, in that many people do need a replacement vehicle if theirs is off the road. However, in reality this market is extremely dysfunctional, and creates significantly inflated costs for insurers, which must ultimately be recovered from customers via higher premiums.
2.10 The key issue is that the credit hire firms are commercial firms, naturally seeking to maximise profits, but the customer using their service is not the person paying the bill. The bill is paid by the other party’s insurer, who is not part of the hire agreement, and so is not able to exert control over the hire to apply normal market efficiencies.
2.11 This sustains a highly inefficient market where credit hire firms routinely provide a replacement vehicle for longer than is required by the customer (LMA member data indicates that average credit hires are 5 days longer than insurer-arranged hires  ). Also credit hire firms provide a replacement vehicle at a higher cost than an insurer could; as much as 2.4 times higher on average  . Also the involvement of credit hire firms in motor claims has increased significantly in recent years; one LMA member reported that cases involving a credit hire claim have increased by 69% in 18 months (between January 2009 and September 2010).
2.12 In a proportion of cases involving credit hire – perhaps 25% - credit hire firms are also involved in managing vehicle repairs, where the same inefficiencies inflate repair bills. These increased costs must ultimately be recovered via premiums. Further, the costs have escalated rapidly; one LMA member has reported that their average credit hire charge has increased by 21% in 12 months.
2.13 Personal Injury Claims: It is the function of motor insurance to assess and pay valid claims. Accordingly a reasonable proportion of claims spend is a legitimate market effect. However, a number of factors have illegitimately increased insurers’ claims spend, helping drive the current increase in premiums. These factors include:
- Excessive/disproportionate referral fees – paid by solicitors to their business sources (including insurers in some cases). These costs are thought to be in the region of £300 to £700 per injury case; this is an estimate as the system is not transparent and the fee is not disclosed.
- After the Event insurance - can add circa £400 to low-value personal injury claims costs, and sometimes includes a significant commission for the claimant solicitor 
- High costs - legal costs to fund no-win no-fee agreements, including recoverable After The Event insurance costs and success fees. The cumulative effect of these fees currently adds circa £2,500 to the cost of an injury claim  .
2.14 Research by one LMA member indicated that legal fees are so disproportionately high that the average legal fees on injury claims, over the last 18 months, have been higher than average general damages paid to claimants  . In their experience this equated to over £1.08 in legal costs for every £1 paid to claimants.
2.15 The Jackson Review has strongly recommended making a series of changes to the civil litigation system to reduce costs – we fully support these proposals and the Government should press on with implementation. The MoJ is due to consult on this issue, and we look forward to responding to this document. Lord Young of Graffham has also recently made some recommendations to improve the UK liability regime, and these recommendations also deserve serious consideration – particularly if the vested interests of middlemen are to be overcome.
2.16 NB The current no-win no-fee funding mechanism saves the Government money as it replaced legal aid. One of the consequences of replacing state-funded legal aid has been to make the process highly profitable for claimant solicitors and their agents to recruit injury claimants and pursue a claim on their behalf.
2.17 Claims Farming: An additional factor driving premium increases is the increase in claims frequency that motor insurers have recently experienced. An LMA member has reported an unprecedented increase of 68% in the number of paid claims in 12 months between Q1 in 2009 vs. Q1 in 2010. Whilst this is not necessarily dysfunctional per se, such unprecedented increases are highly unusual in such a mature market. Most motor insurers have experienced a significant increase in claimants per claim in recent years, most likely as a result of intensive claims farming, encouraging passengers (for example) to bring a claim where they would not have in the past. This is against a background of falling accident levels  . Whilst genuine claimants are fully entitled to damages, the lucrative rewards available to personal injury lawyers, and their agents, would appear to be driving claims farming at unprecedented levels, all of which must ultimately be recovered via premiums.
2.18 Uninsured drivers: The costs and risks caused by uninsured drivers are unacceptably high, creating a significant societal problem. Lloyd’s syndicates currently contribute around £20m a year to the levy collected by the Motor Insurers’ Bureau, which is used to compensate the victims of uninsured or untraced motorists. The total market levy collected in 2009 was over £400m, compared with £274m in 2002, an increase of nearly 70% in 8 years. This expense must be ultimately recovered from the premiums of honest motorists. As well as the economic effects, uninsured drivers are disproportionately high-risk; they are far more likely to drink-drive, cause accidents and drive unsafe vehicles.
2.19 However, despite commendably high annual levels of vehicle seizures by Police, a hardcore of uninsured drivers remain. To take make further inroads, Compulsory Insurance Enforcement is to be introduced in 2011, which will involve enforcement from the Motor Insurance Database record; the Government has agreed to fully fund and implement this urgently needed legislation in 2011, and this timetable and investment must be adhered to if the costs and risks are to be reduced further. Particularly in the context of the downturn in the economy and increased unemployment, more motorists may decide to take the risk of breaking the law and drive uninsured. Education of motorists and heightened enforcement are crucial to managing these risks.
2.20 Fraud: Insurance fraud is on the increase in several areas: misleading insurers when applying for insurance, fraudulent behaviour when making a claim, and organised fraud. His Honour Judge Hawkesworth QC recently stated that "Unhappily, fraudulent claims are now legion. They occupy the court time of District Judges and Circuit Judges in West Yorkshire literally week in and week out…Just about every variant of a fraudulent claim comes before the court. The cost to the insurance industry and to other honest policy holders must be very substantial. In addition the cost in court time in trying such cases is very high". 
2.21 The costs of fraud are very high indeed. In respect of organised fraud alone, the Insurance Fraud Bureau estimates that motor insurers are exposed to £350m of organised fraud per year, adding around £44 to the cost of policies. An LMA member reported that the number of fraudulent claims investigated has increased by 54% in 2009 compared with 2008, and the average value of a motor insurance fraud claim is now over £21,000.
2.22 In terms of Government action to help reduce fraud, we suggest two areas for consideration:
a) Increase the deterrent by stepping up criminal prosecutions for fraud; all too often insurers detect fraud and refer the case to the Police, who often do not progress the case, and they consider insurance fraud to be a low-priority issue. A change in Home Office priorities for Police, better incentivising fraud prosecutions could be prudent.
b) Reform the law to ensure that both first and third-party insurance fraudsters who inflate their claim risk losing their entire award, where fraud is proven (currently this is the case for first-party claimants only).
Consequences of Price Increases
2.23 In most cases, given (third party) motor insurance is compulsory, the main consequence of high premiums is increased economic burden on motorists, leading to reduced levels of disposable income. However, we should also recognise that higher premiums could also create a potential increase in uninsured driving, and a potential increase in fraud.
3. The impact on young people of the high costs of motor insurance
3.1 Young people, and all inexperienced drivers, are likely to experience a particularly high economic burden owing to the current increases in insurance premiums. Higher risk drivers pay higher premiums, and therefore their pockets suffer more, in real terms, when premiums rise. They may also face an increased temptation to drive uninsured, or mislead their insurer when applying for cover; both of which are criminal offences.
3.2 That said, there are two powerful public benefits of the current risk-based pricing model used in the UK insurance market:
- Insureds contribute to the premium pool relative to the risk they present, a fair and proportionate system that ensures motorists enjoy the benefit of lower premiums over time, as their risk reduces with experience.
- Risk-pricing creates a powerful economic incentive to reduce risks; the lower the risk you present, the lower your premium. An alternative pricing model (such as using a flat-rate for all drivers, based purely on vehicle risk) would remove individuals’ incentive to reduce risks, leading to an increase in accident frequency, and higher costs for all.
3.3 In order to reduce premiums, the underlying risks must be reduced. The ABI published detailed research in 2005  , which established that:
- Young drivers were 10 times more likely to be killed or seriously injured than drivers in their 40s.
- Serious accidents involving younger drivers are increasing against a general trend of a reduction in casualty rates.
- A higher proportion of accidents involving young drivers tak e place at night .
- Y oung drivers are much more likely to have an accident as a result of speeding, particularly on a bend, driving competitively with other cars, drink/driving or allowing passengers to distract them.
- Young drivers are much more likely to be carrying passengers when they have an accident.
3.4 Following this research, the insurance industry suggested a series of changes in driver licensing policy in order to reduce risks, reduce premiums and improve the safety of young road users. These included:
- A minimum one–year learning period for all learner drivers to increase experience, and reduce the volume of drivers not accompanied by an instructor or supervisor.
- Passenger restrictions including limiting carriage of passengers, and limiting night-time driving. Multiple passengers and night-time driving have been shown to significantly increase young drivers’ accident risk.
- Education to change attitudes to driving. Whilst we should be realistic as to what can be achieved, there is significant research indicating that attitude to driving is an important safety factor, independent of driving skill.
3.5 Whilst a consequence of these proposals would be to reduce personal mobility, serious consideration should be given to introducing the above initiatives if the risks, and the costs driven by these risks, are to be reduced.
4. 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
4.1 The above are key factors affecting costs. Credit hire is an additional relevant factor currently influencing motor premiums upwards.
4.2 Regarding the prevalence of road accidents, there is an ongoing debate regarding the proposal to change Daylight Saving time, adding an hour to GMT in order to make school journeys safer in winter months (the Bill also discusses other wider benefits). The Daylight Saving Bill 2010-11 is due for its second reading on 3rd December, and the Transport Select Cmt may wish to consider supporting the Bill.
5. 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.
There are several important public policy implications of the issues outlined above. To summarise, we recommend that the Committee and the Government should:
- Note that market reform may be required to remove excessive costs for insurers and consumers caused by credit hire
- Implement Lord Jackson’s proposals in full, to reduce the costs of civil litigation
- Consider implementing Lord Young’s proposals
- Ensure that Continuous Insurance Enforcement is implemented as planned in 2011
- Fully consider proposals to reduce the risks presented by inexperienced drivers
- Incentivise the Police to assist in prosecuting more insurance fraudsters
- Improve Court powers to tackle insurance fraudsters
- Consider supporting the Daylight Savings Bill
 Lord Justice Jackson’s Review of Civil Litigation Costs (2010)
 Lord Young of Graffham’s Common Sense, Common Safety (2010)
 One LMA member reported their average private car premium, between 2002 and 2008, had reduced by 1.1%
 LMA estimate
 LMA member data; 19.5 days vs. 14.5 days
 LMA member data; average credit hire charge of £1100 compared with equivalent insurer costs of £450 in 2009-2010
 Case studies available
 LMA member data; average legal costs in injury claims between January 2009 and September 2010
 LMA member data; between January 2009 and September 2010 average legal fees were £2,375 compared with average general damages of £2,165.
 Department for Transport statistics indicate that reported casualties reduced by 4% between 2008 and 2009. The 2009 figure for road users killed or seriously injured is 44% lower than the 1994-1998 average.
 In Hussein & Others v Khan & Others 
 Young Drivers: Road Safety and the Cost of Motoring
|©Parliamentary copyright||Prepared 11th November 2010|