Car Insurance Premiums

Wednesday 11th May 2011 Westminster Hall

10:59

[Mr Roger Godsiff (Birmingham, Hall Green) (Lab)]

I welcome the opportunity to initiate this short debate under your chairmanship, Mr Weir. The cost of car insurance concerns everybody who owns and drives a car, not least my constituents who live in the B11 and B12 postcodes of Birmingham. I will explain later why I mention those specific postcodes.

I am aware of the detailed report on car insurance produced by the Select Committee on Transport and of the recommendations that it has made to both the Government and the insurance industry. I commend the Committee’s work and welcome its recommendations on personal injury claims and referral fees, uninsured driving, fraud, and the whole question of young drivers, whose driving habits are one of the industry’s biggest justifications for the overall increase in the cost of motor insurance.

The Under-Secretary of State for Transport, the hon. Member for Hemel Hempstead (Mike Penning), made it perfectly clear when giving evidence to the Transport Committee that the responsibility for the level of premiums rests with the market and not the Government. I accept that. However, in some other countries—and not least in one of the Canadian provinces—motor insurance has been socialised or run by a Government agency because the market was unable to handle its responsibility, despite having a captive audience of motorists who were rightly obliged by law to insure their vehicles. I shall not attempt to lead the Minister down that path because I suspect that he would not wish to follow, but I make those points to place them on the record.

After reading the Transport Committee’s admirable report, I was struck by the sheer weight of submissions from insurers, solicitors, claim management firms and their associations—all of whom, purely by chance, are part of the referral system. I got the distinct impression from reading the report that the motor insurance industry was trying to convince the Committee—and, indeed, perhaps itself—that it was not making any money out of the motor insurance business and that it was taking on the onerous burden of insuring motorists only out of some sense of public duty. Indeed, the Committee was told:

“insurers currently spent around £1.20 for every £1 collected in premiums”.

I am sure that the Government would say that those are the economics of the mad house and will lead to bankruptcy. However, the motor insurance industry has apparently kept going purely to help out motorists. The Committee was told:

“the underwriters of motor insurance had been loss-making since 1994”.

I drive to and from my constituency, and I am sure that motorists throughout the whole of the United Kingdom would like to say a heartfelt thank you to the motor insurance industry for being prepared to shoulder such losses for 16 years and for their altruistic attitude towards the whole business.

In case hon. Members think that I am seeking to pillory the insurance industry, I should say that I am not. I recognise that the industry is an important part of the UK’s financial services sector and that, in general terms, it provides competitive and tailored products, such as building, household, personal and holiday insurances. However, all those are optional, whereas motor insurance is, rightly, compulsory.

I pick my words carefully when I say, to put it bluntly, that having read the report, looked into the issue and considered many representations I have had from constituents whose motor insurance premiums had gone through the roof, I think that the motor insurance industry is just milking the motorist. Instead of tailoring insurance premiums to individual driving records and the personal circumstances of the motorist and the vehicle they are using, the industry is taking the cheap and easy option of postcode charging and having box-ticking premiums. It is giving scant regard to an individual’s personal circumstances because it knows that to drive on the highway, someone has to have insurance. Motorists are trapped and the industry can do what it wants.

The motor insurance industry and its lobbyists, some of whom may be here today, are very quick off the mark. My e-mail account was totally inundated and blocked by thousands of representations when those concerned saw that this debate was taking place. I applaud their rapid-response approach to the matter. The Association of British Insurers has said to me:

“the market remains competitive, despite recent rate increases, and some of the best deals may be found by phoning insurance companies or brokers directly rather than by using price comparison websites.”

I will give a couple of examples to show not only that that is incorrect, but that the motor insurance industry uses postcode premiums and gives minimal regard to personal circumstances.

A constituent who lives in Sparkhill, which is in the Springfield ward—one of the wards we gained last week at the local elections from the Liberal Democrats—has been driving since 1987 and has a 10-year no-claims bonus. He has a public service vehicle licence and is a bus driver. His postcode is B11 and he was quoted £1,200 a year for his motor insurance. That is for a PSV holder and bus driver, with 10 years’ no claims. He then used the address of one of his relatives who lives in an adjoining postcode. Apart from that, he supplied exactly the same details. How much was he quoted? Some £276, which is four times less. He is being penalised because he lives in B11. As I said—10 years’ no claims, PSV holder, bus driver. However, he lives in the wrong place and is charged four times as much.

[Jim Shannon (Strangford) (DUP)]

Further to the hon. Gentleman’s last remarks, in Northern Ireland we are subject to higher prices for insurance than in other parts of the United Kingdom—England, Wales and Scotland. In the whole of Northern Ireland, we pay higher prices than everyone else because of our postcode. Does the hon. Gentleman agree that better competitive prices for insurance should be available across the whole of the United Kingdom and that Northern Ireland should not be excluded?

[Mr Godsiff]

I entirely agree with the hon. Gentleman. However, motor insurance is not being discriminatory; it milks the motorist wherever they live in the United Kingdom.

Another constituent who lives in Sparkbrook, B12, has had a driving licence for 38 years and no claims for 10 years. His insurance has been between £250 and £300 for fully comprehensive and his best quote is now £600. He then got quotes for exactly the same driving history but with a Solihull and a Warwick and Leamington address, and they were less than £300. So he is being asked to pay double because he lives in the wrong postcode.

Those are just two examples, but I have many others about how my constituents are being penalised. The motor insurance industry takes the cheapest and easiest option of using postcodes, rather than individual circumstances, to set its premiums. It does so at a time when there has already been a 29.9% rise in motor insurance for all motorists, and young men and women have been subject to rises of 46.6% and 58.8% respectively. That is ridiculous.

Let me give you another example of how the motor insurance industry exploits its monopoly position. I know a person who spends part of his time in the UK, and one or two months abroad every year. He checked recently with his insurance broker to find out whether he could save money by avoiding paying insurance premiums for the months that he was out of the country, and his car was off the road and garaged. He was told by his broker:

“it used to be the case that the Insurance Industry would allow you to not pay premiums for months when your car was garaged and you were abroad but they no longer allow this”.

I contend that that is yet another example of how the motor insurance industry milks motorists, rather than seeking to tailor its policies to their personal circumstances. I am not suggesting for one minute—I would not dream of it—that there is collusion between motor insurance companies, but the fact of the matter is that they openly say that they share information regarding fraud—quite rightly. But it is disingenuous to believe that they do not share information concerning their charging policies and postcode premium policies.

I end by saying this: I do not expect the Minister to bring about a revolution in motor insurance overnight, and I know that he will consider the recommendations of the Select Committee very seriously. However, motorists, like the wider population, are under increasing economic pressure and many people still have to rely on the use of their cars for their daily lives. Furthermore, if young people are priced out of using a car because of the massive cost of insurance, then, I regret to say, there will be an increase in the number of uninsured drivers. That would not be a good thing, and I agree with the Minister about that.

The motor insurance industry has to realise that it is in the privileged position of having a captive audience. Instead of whingeing about not making money out of car insurance—which is not true; everybody knows that it is not true—it should be developing insurance policies that reward careful drivers with a proven record of not claiming, and take into account personal driving history. It should also scrap the unfair and discriminatory policy of penalising everybody in certain postcodes and allow motorists who use their cars only for a certain number of months a year to pay insurance for those months only, instead of being charged for the whole year.

I know that the Minister has listened carefully to what I have said, and I hope that he will depart from his brief and address those two specific points. Those points concern motorists in my constituency, his constituency and throughout the country. I do not see why motorists should be milked by the motor insurance industry.

11:13

[The Parliamentary Under-Secretary of State for Transport (Norman Baker)]

The Minister who normally deals with these matters, the Under-Secretary of State for Transport, my hon. Friend the Member for Hemel Hempstead (Mike Penning), is, unfortunately, elsewhere today, so I am happy to stand in for him. I discussed the matter with him prior to the debate and I will ensure that the comments made by the hon. Member for Birmingham, Hall Green (Mr Godsiff) are passed directly to him, so that he is aware of the specific points that have been raised today. My civil servants will confirm that I am not averse to disappearing off my brief to respond to points in debates. I am happy do so today in response to the points that the hon. Gentleman has made, in so far as I am able to within the responsibilities of the Department for Transport.

First, on the point that the hon. Gentleman made about the nature of the motor insurance industry, motor insurance is sold in a competitive market. There are many players, many different companies, and motorists are able to shop around and find the best deal that suits their needs. How premiums are set is a commercial decision for individual insurers according to the risks that they believe are posed by the drivers concerned, including factors such as experience, age, the type of vehicle and the driver’s record—for example, whether he, or she, has penalty points or disqualifications.

The Department is not aware of any evidence that the market is not working. There are certainly a large number of players who have, in theory at least, an opportunity to carve out a better position in the market by offering different kinds of products to different kinds of drivers. If the hon. Gentleman believes that there is evidence of collusion in the market, then he needs to bring that to the attention of the Competition Commission; it can investigate the market if it believes that there is prima facie evidence that collusion is taking place. I should say that the Department is not aware of any such evidence.

On the issue of postcode charging, the hon. Gentleman gave one or two striking examples involving the B11 postcode. I will ensure that my colleague the Under-Secretary is aware of that issue and that he takes it forward in his discussions with the motor insurance industry.

My experience of this issue relates to the year 2000, when there were problems with flood insurance in my constituency of Lewes in the aftermath of flooding, and with how the insurance industry responded to that challenge. It was certainly the case at the time that, in my constituency, the insurance industry applied a broad-brush approach to insurance premiums, based on postcodes—in that case, the BN7 postcode.

The BN7 postcode encompassed houses that had been flooded and houses, way up a hill, that obviously had not been and would never be flooded, even in the worst possible scenario. The houses up the hill were being invited to pay higher premiums because they were in the same postcode, so I entirely understand the hon. Gentleman’s point.

In that case, the insurance industry has moved on, and one or two companies were able to offer different premiums on a more selective basis, based on their detailed analysis of where was, and was not, flooded. They were able to carve out a market from that, which demonstrated that in that case the industry was working and able to respond, through individual initiative by individual companies, to the circumstances that pertained. I would have thought that there was an opportunity for an insurance company to offer more reasonable premiums in B11 in order to undercut those who apply a crude postcode approach. That is, however, a matter for the industry.

[Mr Godsiff]

I hear what the Minister says, and I know the logic of what he says. I assure him that my constituents are very price-conscious and, particularly in this day and age, very careful with their money. They have searched every alternative. If they had found an alternative, then believe you me, not only would they have taken out insurance with it, but they would have alerted all their friends to the benefits of going to another company. The alternative is not there, despite what the motor insurance industry likes to make out.

[Norman Baker]

I hear the hon. Gentleman’s comments. Obviously, he has looked into the matter in his area much more than we will have done at the Department for Transport. All I can do is repeat the comments that I have made. First, if he believes that there is collusion in the industry, he needs to draw that to the attention of the Competition Commission. Secondly, the Under-Secretary, my hon. Friend the Member for Hemel Hempstead—the relevant Minister for this area—will, I am sure, be interested in his comments and look at the issue of postcode charging. We would like to ensure that the motorist gets a fair deal and is not subject to improper procedures. We want, therefore, to ensure that motor insurance costs are kept reasonable, as far as it is possible for us to influence them.

We recognise that the high cost of motor insurance can cause a number of policy problems and we are working with the industry to help address them. People are dependent on their cars to travel to work, leisure facilities and so on, so this is an important issue for a great number of people. My hon. Friend the Under-Secretary is speaking with the insurance industry on a number of issues, particularly tackling uninsured driving, automatic access for insurers to check the driver’s record held by the Driver and Vehicle Licensing Agency, and addressing the problems of high premium costs faced by young drivers, to which the hon. Gentleman referred.

One area of concern for us is that people may be tempted to drive uninsured. The insurance industry estimates that uninsured driving costs each motorist approximately £30 on their premiums each year.

The Government introduced the continuous insurance enforcement scheme to deal with uninsured drivers. A new offence has been introduced of keeping a vehicle without insurance unless it is kept off the road and a statutory off-road notice declaration has been made to the Driver and Vehicle Licensing Agency. The new scheme regularly compares the DVLA vehicles database with the motor insurance database, which holds all motor insurance policies.

From that comparison, we are able to detect a greater number of uninsured vehicles, rather than relying solely on the police spotting uninsured vehicles in use on the road. We anticipate that the scheme could reduce uninsured driving by 15% to 20%, by taking out the softer evaders and leaving the police to target on the road hard-core offenders who continue to drive uninsured. Obviously, getting uninsured drivers off the road would be of benefit not only to road safety generally, but to those who legitimately and properly pay their insurance and who quite rightly feel aggrieved about having to pay extra in their premiums to deal with the uninsured. I think that that agenda is shared throughout the country—except by uninsured drivers. I hope that it is shared, so that we can get some fairness into the premiums.

The scheme is planned to commence in late June. Under it, keepers of vehicles that appear to be uninsured will be sent reminder letters by the Motor Insurers’ Bureau. If keepers take no action, they will receive a fixed penalty notice and a fine of £100, followed by enforcement action which, in extreme circumstances, might be wheel-clamping, impounding of the vehicle and, ultimately, prosecution. The DVLA will be responsible for enforcement action on behalf of the Secretary of State.

We are also concerned that significant rises in the cost of insurance might increase fraud, with some drivers prepared to make false statements about their driving record to obtain cheaper insurance, such as on how many penalty points they have, whether they have been disqualified and so on. The insurance industry estimates that 40,000 claims are declined already each year at the underwriting stage, on the grounds of non-disclosure or misrepresentation, and that 200,000 claims are adjusted.

Others might be tempted to declare younger drivers as named secondary drivers on their parents’ insurance when, in fact, they are the main driver of a vehicle. We are working with the insurance industry with a view to allowing it access to the driver details held by the DVLA. That will to help to tackle fraud and prevent situations in which drivers might give inaccurate information, consequently invalidating their insurance. The timetable for delivery is yet to be finalised with the insurance industry, but we expect a project of such a size to take between 18 and 24 months to complete all stages of the work, from specification and design to development, and through to a fully operational system.

[Jim Shannon]

Up until now, in response to the hon. Member for Birmingham, Hall Green (Mr Godsiff), the Minister has indicated that everything is about catching those who are not paying insurance and so on. The Government response has indicated nothing about incentives for those who drive well. Not only in Northern Ireland, but all over the United Kingdom, people who drive well and who have passed advanced driving courses should qualify for a reduction in their insurance risk. Is that something that the coalition Government are considering? If so, what discussions have they had with the insurance companies?

[Norman Baker]

Personally, I believe it is right for drivers who drive well to be rewarded, and that occurs in a sense with no claims bonus systems, which are well established in car insurance. Generally, submitting no claims drives down the costs year on year for a driver relative to other drivers.

Whether insurance companies ought to identify further opportunities to reward good drivers is a commercial matter for them. For example, I know about some schemes that benefit older drivers with clean licences, or others for people driving an historic vehicle. Premiums can reflect guarantees to drive less than a certain number of miles each year, or that drivers of an historic vehicle probably want to take care of that vehicle, so they would be less of a risk to the insurance industry than they might otherwise be.

I come back to my central point, which I made at the beginning: the market is competitive, including a large number of insurance companies. If I were running an insurance company, I would want to look for the niche market and the opportunity to identify a set of safe drivers who are less likely to make a claim. We could then offer that group a good premium, pulling one big market in and collecting together all the low-risk drivers, and so benefiting from paying out less. Insurance companies in a commercial market have such opportunities, and can identify them better than I can. Any business worth its salt would reward good drivers, because they are better business for the insurance company than are bad drivers, for whom they are paying out.

One particular concern of the Government is the impact of high insurance costs on young drivers. I accept that the higher premiums faced by younger drivers reflect the cost to insurers of covering the risk for two main reasons. First, insurance companies’ figures suggest that as many as a fifth of newly qualified drivers make a claim within six months of passing their test. Many are relatively minor bumps and scrapes, but the overall cost to an insurer of even modest damage is likely to be higher than a young driver will have paid in his or her annual premium. We recognise that the cost of damage claims affects all insured drivers, although groups that are over-represented in claims, such as young or newly qualified drivers, are likely to cost insurers more.

Secondly, insurers have to make special provision for young people. A minority of accidents can unfortunately lead to catastrophic claims, in particular when one or more claimants might require long-term or even life-long medical care. The problem with young drivers is not simply that claims are more likely, but that such costs are liable to be much higher if the claimant is young. In addition, only a limited number of big insurers can afford provision against such claims, which in this area limits the market in which young people can buy insurance. The usual recommended option of shopping around for the best price, therefore, is less effective for young drivers than for older drivers. If the hon. Member for Birmingham, Hall Green has researched that aspect, we would be interested in hearing about his specific examples of how young drivers in his constituency are affected in insurance terms.

One effect is that young drivers, including learner drivers, often find that rises in insurance costs are increasingly prohibitive. Many young people depend on a motor vehicle to obtain better access to education and employment, and they often learn to drive for such reasons. We do not want to deprive people of that opportunity.

Some insurers have argued for the Government to impose additional regulation on newly qualified drivers so that they would not be allowed to drive in high-risk circumstances, which might improve road safety. Other specific restrictions have been proposed, including those in other countries where driving is permitted below the minimum age here. We are, however, reluctant to impose more regulations on young people, because doing so would bear down on those who want to be safe and responsible. It might reduce access to employment and education, while enforcing regulations might involve significant costs. There is also a risk of perverse consequences; for example, limiting the carriage of young passengers might prevent a sober driver providing transport for companions who have been consuming alcohol.

The Department has been working on alternative approaches, such as measures to improve driver training and testing, and is considering whether further measures should be developed. Training should focus not only on the test, but on the challenge of independent driving, including, for example, an understanding of the risks of particular driving conditions, and of distraction and impairment. A range of measures have been taken already, including a voluntary foundation course in safe road use to help pre-drivers and learners, which is aimed primarily at 14 to 16-years-olds. We also intend to work with the insurance industry on whether new or existing insurance products can be developed, with discounts if young drivers choose enhanced training before and/or after the test, or are happy to accept in return restrictions such as not driving at night.

In addition, my Department is in regular contact with vehicle manufacturers and suppliers on developments in new vehicle technology, including driver information systems and parental controls. Such technology might demonstrate how young drivers are driving and could provide important information on behaviour and their insurance and casualty risks. The insurance industry is already making use of technologies and new products when young drivers are willing to accept restrictions or training. The Government are keen to work with the industry on such matters.

The number of personal injury claims has increased at a time when the number of casualties has reduced, which we believe has had a consequent effect on costs incurred by insurers. There have been concerns around high legal costs in civil litigation, in particular under no win, no fee conditional fee agreements. The Government are committed to addressing such concerns and welcomed Lord Justice Jackson’s final report on those matters, which made a broad range of significant recommendations for reducing costs in the civil justice system.

The Ministry of Justice published “Proposals for Reform of Civil Litigation Funding and Costs in England and Wales—Implementation of Lord Justice Jackson’s Recommendations” on 15 November 2010. The Department announced on 29 March 2011 that it will abolish the general recoverability of the CFA success fee from the losing side; abolish the general recoverability of after-the-event insurance premiums; and introduce the package of associated measures set out by Lord Justice Jackson. Through the Legal Services Board, we are also considering the issue of referral fees.

Finally, we should recognise that the most effective way of controlling costs is to reduce the number of road accidents and casualties. The Government are strongly committed to improving road safety and we are setting out our plans in a strategic framework published today.

11:30

Sitting suspended.