After being pounded by the press for putting premiums up, Leigh Jackson looks at the future of motor insurance and asks whether policyholders could do more to help themselves.
Few insurance industry issues have sparked interest in the wider public arena to the same degree as motor insurance. The continued rise in the cost of cover has enraged motorists and forced its way onto the agenda of the mainstream print and broadcast media.
The issue is one of great concern. In April, research by the AA revealed that the average 'shoparound' comprehensive car insurance policy now stands at £892 — a rise of more than 40% in the last year.
And that is an indicative average, with rates for young drivers proving to be much higher. Last month, an 18-year-old Slough resident was reportedly quoted £72 000 to insure his £600 Vauxhall Corsa, while a fellow teenager decided to ditch his Volkswagen Polo in favour of 1953 Fordson Major tractor after receiving a quote of £17 800.
Both cases were picked up in the national press, which has been heavily critical of motor insurers and their pricing. Just last week, the Daily Mail accused the "greedy" industry of "mugging" motorists.
However, is the media right to question the appetite of insurers to profit from motor cover? With companies facing significant increases in the value and frequency of personal injury claims, surging credit hire costs and high levels of fraud, should the buck stop with the industry? Or should policyholders and the government step up their own efforts to help solve the problem?
Taking on board technology
The use of telematics is one solution that may enable young policyholders to get a handle on the surging cost of cover. The in-car devices measure driving behaviour and habits, allowing insurers to more accurately price the risk for individuals. But are young drivers willing to have a 'black box' installed?
"Telematics is an example of what can be done to make premiums affordable as well as improving driver safety," explains Martin Otter, insurance development manager at Trimble. "A typical saving would be in the region of 30% on the premiums and for some risks it could be higher. We have seen examples where people have saved up to 50% on their premiums."
The technology is also likely to have an effect on driver behaviour, encouraging traditionally risky motorists to act more sensibly with the reward of better premiums and a decreased likelihood of claims, making telematics a solution for a wider section of the public.
"How, when and where you drive affects the risk for everybody," Mr Otter continues. "It is not just young drivers. This is a proposition that works for both younger and older individuals."
Nick Moger, chief executive of Marmalade Group, says that telematics could be used by all motorists in the near future. "In five years every vehicle will have it, particularly because of the gender ruling. In financial terms, there is a big difference between male and female drivers and this will allow insurers to price on an individual basis."
Towers Watson director Duncan Anderson agrees. "I have no doubt that large chunks of the market will be using it — it is the future," he says. "It has allowed a better assessment of risk which the insurer can feed back to the policyholder.
"Safe drivers can be rewarded for being better drivers and a lower risk. Telematic devices, if used in the right way, can be hugely discriminatory for risk purposes."
Telematics is not the only technological advance that policyholders could implement to help reduce their premiums. Insurance repair research centre Thatcham has been testing cutting-edge vehicle safety features — such as autonomous emergency braking and pedestrian avoidance technology — which could also play an important role.
According to Thatcham research, AEB systems — which use radar, cameras and lasers to automatically stop cars poised to crash — could prevent more than 2700 pedestrian casualties each year if incorporated into all production models.
In addition, the new systems could prevent up to 160 000 whiplash injuries a year — a primary cause for the increase in the cost of motor cover. While the technology is only currently available in a handful of models, there is hope that it can make a major difference once these features become common in a wider range of vehicles, and if the demand is there.
"Some of the technology might take some time to get into the mainstream," Zurich technical underwriting manager Steve Gilbert says. "Like anything, once it is used more regularly it will start to be recognised in the performance and the premiums asked for. Most of the technology is in new models and the industry runs largely on the second-hand car market, so these changes will not be widely available for a while to come."
Groupama personal lines director Kevin Kiernan suggests that although most insurers don't offer specific discounts for such technology at the moment, they would be likely to do so in the future.
"We are looking to make a leap of faith as we won't see the difference in the claims statistics for a while to come," he explains. "But we are fairly sure if there is less chance of an accident than the third party injury aspect would be reduced, making it much safer."
Paying for safety
With these features — as add-ons — typically costing between £500 and £1000, the expense might hit the take-up. However, Thatcham director of research Andrew Miller says that, in time, cost will not be an issue.
"Historically, people have been willing to pay for safety but it depends on the driver," he says. "Manufacturers understand that prices will have to come down. That is how they work: they create the technology, move into the consumer space and then they gradually decrease in cost."
In addition, Thatcham is one of a number of stakeholders in talks with the Association of British Insurers about advantageous group ratings, for drivers employing advanced technology.
"This is being discussed with the ABI and the manufacturers," Mr Miller continues. "It's all about creating the public interest and the marketing interest from an insurer's perspective."
While talks may be ongoing for discounted rates for the use of safety features, discounts are already available for drivers who have an advanced level of skill behind the wheel. Motorists who have successfully negotiated the Driving Standards Agency's Pass Plus scheme are offered a range of benefits from a panel of insurers including Young Marmalade, RSA and Direct Line but it appears that the take up of the scheme is still relatively low.
"We are not seeing drivers taking up an increasing amount of advanced courses," Gareth McChesney, head of home and motor portfolio management at Allianz Retail, says. "We haven't seen any evidence of this but, if the driving test can be improved to take into account a range of driving conditions, that would be welcomed.
"We have to understand that the driving test educates to a compulsory basic level for using a vehicle. I don't think that it ticks all the boxes — for example, it doesn't include motorway driving, driving at night, or driving in poor weather conditions."
Mr Gilbert explains that the fact the majority of insurers do not offer discounts for advanced driving has dampened enthusiasm for the scheme. "Some insurers do, Zurich doesn't at the moment but that is an area we continue to monitor. We suggest that it is best to have an advanced course in place but, in the scheme of things, there are lots of factors having a greater effect on the performance of certain risks."
He adds: "Going into schools and explaining to youngsters what driving is all about — the costs and the hazards involved — as early as possible is something, as a society, that we haven't been able to do."
Making driving education part of the schools programme is a small part of a wider call to get the government more involved in helping to lower premiums. Moves to tackle cash-for-crash fraud rings with high-profile police operations, such as a recent raid by Bedfordshire Police in Luton, have been welcomed by the insurance industry but many have argued more could be done by the government to cut the cost of motor insurance.
The Transport Select Committee published its report in March and has recommended a number of measures designed to reduce premiums (see box, p27) but some industry commentators still feel that the report is a missed opportunity.
According to Mr Kiernan, the government should be doing more to reduce the number of motorists fraudulently claiming for soft tissue injuries. "The compensation culture and the courts are what really need to be tackled," he says. "If I am honest, I would like anyone who has a whiplash claim to face a lie detector test. There needs to be rules about when you're allowed to claim. It still seems too easy to claim and gain compensation."
There is also a consensus that the government needs to ignore the recent recommendations put forward by the Legal Services Board and, instead, ban referral fees.
"It is disappointing that the Transport Select Committee didn't come out more strongly to back Lord Justice Jackson's view of referral fees," Mr Anderson says. "The government needs to ban these fees. That would control the costs around motor insurance and would be more effective than the LSB's recommendations of greater transparency."
The cost of cover
Transport Minister Mike Penning MP backed the government's recent work in trying to address the cost of cover — namely the Continuous Insurance Enforcement scheme and a proposed data sharing agreement between the DVLA and the insurers — but added that it was crucial for stakeholders to continue to collaborate.
"Everyone needs to work together to tackle the rising cost of insurance and the government is fully committed to playing its part," he says. "That is why we are taking action in a number of areas to reduce uninsured driving and insurance fraud as well as to improve the safety record of young drivers."
Regardless of who is culpable for the rapid premium increases and their future control, insurers operate in a free market where they can set prices. Will there be a temptation, in a sector that has been difficult, to hold on to any savings made and not lower premiums for policyholders?
Many underwriters do not currently offer discounts for the use of advanced safety technology or for Pass Plus, so what hope is there that policyholders will see lower costs if changes are made? Insurers, and Transport Minister Mr Penning, believe they will.
Mr Anderson says that even if insurers wanted to profit from an improvement in the motor claims environment it would be difficult to do so.
"The market is viciously competitive, so no matter how much they would like to keep the profits they won't be able to," he continues. "The motor insurance market and the increase in aggregators has meant that there is huge price elasticity. It will be hard for an insurer to make an inappropriate profit but it is right and proper that they make money. They have lost tremendous amounts in recent years."
He concludes: "Ill-informed articles explain how evil insurers have been making excessive profits and penalising poor policyholders, when actually the reverse is true. There is a PR problem that the insurance industry has as a whole with the press blaming them for not understanding their terrible results. Premiums fit claims and they have had to increase but, hopefully, this will change."
Transport Select Committee proposals
A Department of Transport sponsored research project on how personal injury claims are tackled abroad with a discussion paper published in 2012.
A promotional campaign to make drivers aware of Continuous Insurance Enforcement and a review of the CIE penalties one year after its introduction.
More detail on insurer data-sharing with the DVLA, with a precise introduction date preferably by the start of the 2012/2013 financial year.
A dedicated insurance industry police force to tackle fraud by 2012/2013.
A more difficult driving test for young motorists.
The wider use of technology to assess the driving habits of young motorists to better assess the risk.
Motor insurance in numbers
40 — percentage increase in the average 'shoparound' comprehensive car insurance policy in the last year
£500 to £1000 — the current cost of autonomous emergency braking and pedestrian avoidance systems per vehicle
160 000 — number of whiplash injuries that could be prevented by AEB systems.
2.4 million — number of whiplash claims made in 2009.
£5.3m — value of the cash-for-crash fraud ring recently smashed by the Bedfordshire police
£1.9bn — estimated yearly cost of undetected motor insurance fraud
£2bn — amount insurers pay out in whiplash related claims
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