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FEATURE: Motoring ahead

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10/09/2012
The cost of car insurance is rising but the pace of increase has, thankfully, started to slow. Ian Crowder reports

It’s said that there is nothing more certain than death and taxes. But you could add to that, ‘rising car insurance premiums’ as it seems that over the past two or three years, the upward spiral of car premiums has been relentless.

But figures from the AA’s latest benchmark British Insurance Premium Index (for the second quarter of 2012) show that the rate in increase has slowed and, for customers, not before time. The average ‘Shoparound’ cost of a comprehensive insurance policy, based on the five cheapest premiums for each ‘customer’ in a broadly-based basket of risks, is £1,035 – an 8.5 per cent increase over the previous 12 months.

That may still seem steep but it’s nothing compared with the 40.1 per cent hike for the year ending 30 April 2011 and 22.5 per cent for the year before that.

Unfortunately, it is young drivers who have seen the brunt of the increases and, according to the AA’s Index, a driver aged between 17 and 22 years old can now expect to pay more than £2,500.

According to a recent study by Ernst & Young, even despite these increases insurers are still returning losses and are not expected to show underwriting profits for at least another two years. In other words, income from premiums is less than payouts for claims.

But while few will shed a tear for the plight of car insurance companies, it does mean that we can expect premiums to continue rising for the time being, although the pressure of competition will keep the rises in check.

In the news

Car insurance has been top of the news agenda for quite a time. In 2010, the House of Commons Transport Committee opened an inquiry into car insurance, gathering both written and oral evidence from a wide range of interested parties including accident management firms, lawyers, insurers, brokers (including the AA) and industry bodies a such as the Association of British Insurers (ABI) and the British Insurance Brokers Association (BIBA).

Out of that came the clear evidence that there is a range of factors influencing premiums that have become simply out of control. This was followed last year by an Office of Fair Trading (OFT) inquiry into the ‘dysfunctional’ claims process, particularly credit hire firms that handle repairs of damaged cars and loan vehicles.

The investigation, which has been referred to the Competition Commission, has been welcomed by the insurance industry as another step towards reducing claims costs. Across the industry as a whole, at the beginning of 2010, for every £100 taken in premium, £122 was being paid out in claims, which was clearly unsustainable.

What was behind this shocking gap? Going back further, in 2005 premiums were falling despite a sharp rise in costs attributable to rising numbers of personal injury claims, rising fraud and uninsured driving; more expensive repairs as cars become more complex and greater regulatory costs. And the development of price comparison sites helped to keep premiums artificially low so that, along with the start of the recession which saw insurers’ investment income drop sharply, significant price rises became inevitable.

Personal injury claims have been the key culprit of growing claims costs. Growing anger among politicians and policyholders at a personal injury claims culture which makes the UK the whiplash capital of Europe: in fact, 1,500 whiplash injury claims are made every day despite the fact that over recent years, the number of crashes on Britain’s roads has been falling.

Pain in the neck

Either there is something wrong with Brits’ physiology that leads to a greater likelihood of whiplash or there is something more sinister going on. Don’t get me wrong: whiplash injury can be serious and very painful, as anyone who has spent months in a surgical collar following a crash will tell you. But it is vital that spurious claims are weeded out from those who have genuinely suffered.

Whiplash is an easy injury to claim for even if there has been no injury. It has led to some significant organised ‘cash for crash’ scams that have creamed millions of pounds from insurance companies for non-existent whiplash injury claims. It has also encouraged ordinary motorists to make claims following minor accidents, encouraged by ‘ambulance-chasing’ firms of the sort that send the kind of text messages we have all received.

Unfortunately, while it is difficult to categorically diagnose a whiplash injury unless serious, it is also impossible to disprove that someone has suffered: hence the number of successful claims even if insurers are doubtful of their validity. In fact, late last year the issue led former Labour Justice Minister Jack Straw to claim that whiplash injury could only be diagnosed by ‘second-rate doctors working for personal injury law firms’.

New proposals from the Justice Ministry will make it more difficult to claim. Amongst proposed measures is to use a panel of independent medical practitioners to better diagnose whiplash injury, as well as new guidelines for family GPs; reduction of fees that lawyers can earn from such claims; reform of ‘no-win, no-fee’ legal claims; banning of referral fees where payments are made by lawyers for contact details of people who have been involved in crashes.

This will bring England and Wales more in line with the Scottish legal system which discourages frivolous whiplash claims. That’s why premiums north of the border are significantly cheaper than in England and Wales.

In addition, the insurance industry has been stepping up its fraud management processes while the new Police Insurance Fraud Enforcement Unit has already recorded some notable successes in tackling cash for crash scams as well as ‘ghost brokers’ who sell apparently legitimate policies mainly to immigrants from Europe, who drive around unaware that their policies are worthless until they are stopped by the Police.

Economy with the truth

In a further measure to strengthen fraud control, the Government is committed to providing access to DVLA data for insurance companies. This will at a stroke, help to curb the number of people who withhold information or provide false details such as age, driving experience, convictions and so-on as people attempt to lower their costs by changing the information on which the premium is calculated.

Be warned: if you make a claim and it transpires that you have given false information to your insurance company, they will be within their right to refuse to meet the claim and cancel your policy, making it very difficult for you to obtain cover in the future.

And there’s encouraging news on the uninsured driver front, too. The introduction of ‘Continuous Insurance Enforcement’ (CIE) a year ago, making it illegal to keep a car that isn’t insured or subject to a Statutory Off Road Notification to DVLA, has led to a reduction in the number of uninsured drivers. It is now around one out of every 25 (down from one in 20) which is still far too many, but nevertheless a positive step.

Although there is no ‘quick fix’, all of these changes should help to reduce insurers’ costs and thus lead to lower premiums. We expect to see small premiums increases continue over the next 12 months or so but by then they should have levelled off and perhaps even started to fall as new legislation takes effect. But there is another cloud looming.

The European Court of Justice gender ruling comes into effect on 21 December this year. From that date, insurers will no longer be able to differentiate between male and female drivers. That’s a serious blow for young women especially, who pay up to 40 per cent less for their insurance than their male peers.

The ruling lead to a significant growth in telematic or ‘pay how you drive’ insurance such as the AA’s Drivesafe cover which measures driving performance, regardless of gender. Safe drivers can see reductions of up to 50 per cent in the premiums they pay. New technology of this sort will change the landscape of car insurance and some suggest that systems such as this should eventually become mandatory.

But that’s a topic for a future story.

Ian Crowder is public relations manager for AA insurance

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