Submission from Saga Group
1. The Transport Committee is holding a short inquiry into the cost of motor insurance, focusing on:
· The reasons and consequences of recent increases in the cost of motor insurance
· The impact on young people of the high costs of motor insurance
· 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
· 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.
2. Saga Group is the pre-eminent provider of services, including motor insurance, to the over 50s in the UK. The motor insurance sold by Saga is provided by our in-house insurer Acromas Insurance Company Limited (formerly Saga Insurance Company Limited).
3. This submission from Saga Group considers the first, third and fourth of the issues raised by the Transport Select Committee. As we are focused on those aged 50 and over we have not commented on the issue of young drivers.
Reasons for and consequences of the recent rise in motor insurance prices
4. The cost of motor insurance in the UK has risen substantially since the middle of 2009. The most recent AA private motor insurance “shop around” index showed an average increase of 40% from the third quarter of 2009 to the third quarter of 2010. A number of other market commentators produce price indices that all show similar increases to the AA index.
5. These are unprecedented increases for the motor insurance market.
6. The primary driver of these increases in premiums is an increase in personal injury claims costs for motor insurers. Personal injury claims have significantly increased motor insurers overall claims payouts which has necessitated large increases in premiums. We, like other motor insurers, have seen a significant increase in personal injury claims in recent years.
7. The Institute of Actuaries Third Party Working Party has recently completed an analysis of trends in motor insurance in the UK based on pooled data from a large number of insurers. This data showed that:
· The number of road traffic accidents has been falling since 2007
· The number of personal injury claims arising from these road traffic accidents has been increasing rapidly in the same period
· The average cost of these personal injury claims has also been rising rapidly
· The total effect of increasing numbers of personal injury claims and the increasing average costs of personal injury claims has increased insurers’ bills for personal injury claims by 30% per annum. This is a massive increase against the background of reducing accident rates.
8. In our view, the primary driver of the increased number of personal injury claims is the aggressive advertising tactics used by claims management companies. These organisations seek to find individuals who have been injured and pass them onto personal injury lawyers. The personal injury lawyer pays the claims management company a referral fee for each potential personal injury claimant. The claims management companies have engaged in increasingly aggressive marketing in recent years including:
· Extensive newspaper and television advertising
· Cold calling
· Cold emails and text messages
· Assumptive questioning tactics and the “leading” of actual and potential claimants
· Pressurising those involved in road traffic accidents to make personal injury claims.
9. The aggressive advertising tactics used by claims management companies are generating a “compensation culture” in the UK by encouraging people to seek compensation for any accident or injury. In addition, there has been an increase volumes of fraudulent claims. The frauds take a number of different forms of which the most common are:
· Fabricated accidents where no accident has taken place but the parties nevertheless conspire to put forward personal injury claims
· Deliberate accidents (co called “crash for cash”) perpetrated by organised crime
· Exaggeration of injuries suffered in a genuine accident in order to increase damages
· Multiple vehicle occupants fraudulently claiming to be injured as the result of an accident. Typically, the condition alleged is mild neck pain (whiplash).
10. It is not just motor insurers who will have experienced increases in costs due to the “compensation culture” created by the aggressive advertising tactics employed by claims management companies. Local government will have seen increasing claims for alleged injuries arising due to trips and falls. The National Health Service Litigation Authority report and accounts for 2010 show very clearly on page 13 that the number of claims received by the NHS has grown very significantly in the last two years. For example, clinical claims have grown from 5,470 in 2007/08 to 6,652 in 2009/10 -an increase of 10% per annum. These additional claims will impose rising costs on the NHS.
11. The recent rise in motor insurance premiums affects all motorists in the UK. Young drivers have seen particularly high increases but the effect on the over 50s have also been significant. The AA index shows increases of almost 30% in the last year for drivers aged 50 or over (compared to 40% for all drivers). Such a substantial increase in premiums will further stretch the budgets of pensioners, many on fixed incomes, in difficult economic times.
12. Certain areas of the UK have seen particularly high increases in premiums. In our view it is no coincidence that the highest motor insurance premiums are payable by consumers who live in areas with very large numbers of claims management companies (the M62 corridor in the North West being an example).
Factors influencing the cost of motor insurance
13. The cost of motor insurance is primarily driven by the cost of motor insurance claims. The inquiry suggests a number of factors that may have an effect on motor insurance prices and we have commented on the importance of each below
Prevalence of road accidents
14. The prevalence of road accidents is of course a key determinant of motor insurance prices. In recent years, the prevalence of motor accidents has declined which might suggest that motor insurance claims should have declined. However, as discussed above, the beneficial effect of lower accident claims (“bent metal”) has been more than offset by the increase in the number and cost of personal injury claims.
15. Insurance fraud has caused part of the recent increase in motor insurance prices. The ABI estimates (ABI, General Insurance Claims Fraud, 2009) that £930 million of motor insurance fraud went undetected in 2009 which they estimate adds £39 to the cost of an average motor premium.
16. We have a significant team dealing with insurance fraud. There are many patterns in these claims but two of the more interesting issues are:
· Fraud is more common in areas of the country with a high density of claims management companies
· We see increasing volumes of more sophisticated fraud rings which are often fabricating accidents to try to make fraudulent personal injury claims. Often a firm or firms of solicitors are central to such rings. In our view it is important that the Solicitors Regulation Authority (“SRA”) acts proactively to deal with errant members of the legal profession.
17. Legal costs have been an important driver of the increase in motor insurance premiums. Approximately half of the claims on a motor insurance policy relate to personal injury claims. On the Saga motor account approximately 40% of the amounts paid out for personal injury claims goes to lawyers with the remaining 60% going to the injured party. Thus legal costs account for approximately 20% of insurance premiums.
18. For small bodily injury claims where damages of between £1,000 and £5,000 are paid, our experience is that claimant legal fees are, on average, only very slightly below the level of damages paid to the injured party. Small claims below £5,000 are the vast majority of bodily injury claims by number and represent a large proportion of insurers’ costs.
19. In our view the legal fees which claimant solicitors are able to recover in personal injury cases significantly exceed the true cost of completing the legal work. The changes in the profession, following the Access to Justice legislation in 2000, meant that legal firms were allowed to pay referral fees to claims management companies and other referral sources, usually in lieu of marketing activity undertaken by the solicitor itself. The proliferation of claims management companies in recent years has been a direct result of the referral fees paid by solicitors. In consequence the marketing by claims management companies has become more aggressive as those referral fees have been chased. In a very significant way this has contributed to the increased frequency of small personal injury claims. Indeed, it is interesting to see that Scotland has a much lower frequency of personal injury claims than England. In our view this is because the lower level of fees which claimant solicitors receive in Scotland for whiplash and other minor injury cases do not allow them to pay large referral fees which in turn means that the type of claims farming practiced by claims management companies in England and Wales is uneconomic.
20. We see no signs that the recently introduced MOJ (Ministry of Justice) reforms have reduced aggressive advertising by claims management companies.
21. The insurance industry pays a levy for uninsured drivers. This levy amounts to approximately 3% of motor insurance premiums. Thus, at present the level of uninsured driving is not a key driver of motor insurance premiums.
22. The rise in motor insurance premiums is due to a significant rise in personal injury claims in the last few years. If personal injury claims are allowed to continue to rise, the cost of motor insurance will undoubtedly continue to increase rapidly. This will be increasingly painful for motorists who already find their family finances stretched by the economic downturn. Inevitably, some drivers who can no longer afford insurance will drive uninsured.
23. In our view the key drivers of the increase in personal injury claims are 1) claims management companies with their increasingly aggressive marketing, 2) the rise of insurance fraud and 3) the ever-increasing compensation culture (which in turn is fed by 1) and 2) ). Unless the compensation culture is decisively addressed, we believe that motorists will continue to see rapid rises in their motor insurance premiums. The NHS and local government will also see ever rising costs of litigation. The cost of other types of insurance exposed to personal injury, such as employers’ liability, will also increase, placing an increasing burden on industry and making the UK less competitive.
24. There are a number of possible ways in which the compensation culture could be addressed. Indeed, the experience of other countries illustrates some of the possible courses of action:
· As discussed above, Scotland has a different legal system and the amount which claimant solicitors can recover in minor injury cases is rather smaller than in England and Wales. These lower fees mean that solicitors cannot afford to pay large referral fees or spend large amounts on advertising. We see much lower personal injury claims in Scotland, much lower levels of claims fraud in Scotland and our Scottish policyholders enjoy lower motor insurance premiums.
· The Republic of Ireland had a significant problem with increasing personal injury claims driving up the cost of motor (and other liability) insurance to unaffordable levels. Ireland responded by introducing the Personal Injuries Assessment Board (“PIAB”) in 2003. In simple terms PIAB acts as a conciliation service for personal injury claims. All claimants are required to use PIAB initially and legal costs are heavily restricted if the claim can be settled quickly. The effect of PIAB was to reduce the legal costs incurred in the process significantly and it led to a large reduction in motor insurance premiums in Ireland.
· In Germany, based on biomechanical evidence, the courts assume that any accident below 10kph cannot cause whiplash - which removes a significant part of the low value but high cost claims.
25. However, in our view, if the Government wishes to restrict the growth of the compensation culture, the best approach would be to address the primary cause of this growth directly. We have explained why we believe excessive and inappropriate advertising for personal injury claims is the primary cause of the compensation culture and high motor insurance premiums. We believe that the best solution would be to severely limit the level and type of advertising permitted by claims management companies and solicitors.
26. In his recent report (Common Sense, Common Safety) for the Prime Minister, Lord Young of Graffham made a number of recommendations including restrictions on the type and volume of advertising by claims management companies and solicitors. Lord Young discusses this issue on pages 20 and 21 of his report under the heading “The regulation of claims management companies”. In our view, this is the most important recommendation in Lord Young’s report and is a key step in addressing the compensation culture.