Car Insurance

(Limited Text - Ministerial Extracts only)

Monday 5th March 2018 Westminster Hall

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

It is a delight to serve under your chairmanship, Mr Davies. I would say I was speechless at the joy, except that I have to make a speech. I thank the hon. Member for Clwyd South (Susan Elan Jones) for opening the debate as she did on the important subject of insuring cars rather than the individuals who drive them. I also thank all hon. Members for their contributions, and I welcome the hon. Member for Reading East (Matt Rodda) to his position on the shadow Front Bench. It will be a delight to address some of his points.

I hope I can assure hon. Members that the Government take the cost of motor insurance seriously and are committed to ensuring that it is reasonable for all motorists. To do that, we have sought to identify the root causes of high insurance premiums and to address them directly, but we have no plans to change the current motor insurance system, as stated in our response to the petition, and there appears to be consensus across all the parties whose Members contributed to the debate that that is the correct position.

I will first outline the system and some of the issues and then come on to all the important questions raised by colleagues from across the House. The UK was one of the first countries in the world to recognise the benefit of compulsory motor insurance, back in 1930. Our long-standing approach has been that it is an individual’s use of a vehicle that has to be insured. The current system of insuring individual drivers, rather than vehicles, does not, as has been noted, prevent named drivers from being added to an insurance policy for shorter or longer periods, which can be a cost-effective way for friends or relatives who share a car to be included on a single policy. For a typical family of four sharing a car, the saving with a named-driver policy rather than each family member having their own policy has been estimated to be more than £1,000. There are also new insurance products coming on to the market that facilitate short-term cover, including insurance by the hour and car-sharing arrangements, without the need to change insurance law. Such products make it easy to arrange cover for someone else using your car. One new car insurance app quotes an average of £10.90 for an hour’s coverage, which can be set up at very short notice, and I am sure we can expect further developments of such pay-as-you-drive solutions in the coming years.

It is important to note, as colleagues have, that it is not at all clear that changing the system would reduce the cost of insurance. In fact, there is every reason to think it could raise it. The complexity involved in changing the system would have significant cost implications, yet would not necessarily produce tangible benefits for the consumer. Some countries opt for a car-based rather than a driver-based system because they have no-fault legal regimes, under which each insurer compensates their own policyholder. So it is a question not just of how people purchase insurance but of the wider civil law principle of liability, which is different in the UK from those other countries. Changing our motor insurance system would almost certainly, therefore, involve complex legal changes and require detailed consultation. A change in the underlying legislation would mean that all insurers would need to redesign the systems they used to offer quotes, which, as the hon. Member for Reading East hinted, would be a complex and lengthy exercise and could have significant cost implications for both the industry and, in due course, consumers. Given the alternative solutions available, such as adding a named driver or adding “drive other car” options to motor insurance policies, such significant reforms would be disproportionate.

The price of insurance currently depends on a range of factors, including many that are driver-specific: driving history, including previous claims and unspent drink-driving convictions; the use made of the vehicle, for example, whether for commuting or business; and years of driving experience. If insurers were required to cover the vehicle and were not able to take such factors into account in their pricing, the cost of insurance would likely rise for those with a good driving record and a history of safe driving and they would end up bearing, on a net basis, the additional costs of drivers who were not as careful or safe. The evidence for that is that insurers already tend to charge much higher premiums for any-driver insurance policies, under which less good drivers can join a named driver. Named-driver policies allow friends or relatives who share a car to be included on a single policy and provide the insurance provider with the necessary information to assess the potential risk of each individual.

Turning, as one or two colleagues have already done, to the scenario used in the petition, I wish to note that it is based on a drink-driving situation. Three friends need to get home from a night out, two of whom, including the driver, are under the influence of alcohol and are unable to drive. The petition suggests that a system that insured the vehicle would enable the third friend to drive the group home. However, as has been mentioned, the risk could be significantly greater than is suggested. As has been noted, the owner’s friend may never have driven the vehicle and may have much less overall driving experience or a significantly worse claims history. In an era where vehicle technology is changing rapidly, the variety between newer and older cars is only getting greater, so the driver’s individual experience of a particular make and model of car will have increased significance.

We have to think about the cost of covering vehicles, not people, as well as the incentive that creates. If that group knows that one of its members—they may be the least experienced driver—will be sober, that could create an incentive that removes the restraint on people’s drinking. There may therefore be collateral unexpected consequences, even within the scenario that was set out. That by no means means that the Government are not determined to seek to reduce the cost of insurance, and it is important to make that clear. We have no plans to change the current system, but that does not mean we are not tackling other key issues known to drive up the cost of premiums, several of which have been discussed today.

One issue that has not been discussed is that of the measures we are taking to tackle the high rate of fraudulent, minor and exaggerated whiplash claims. The scale of the problem is highlighted by the fact that 85% of personal injury claims made in 2016-17 relating to road traffic accidents were labelled as whiplash or soft tissue injuries to the neck and back. I am afraid these data are four or five years old, but that figure compares with 30% in France and Denmark, 31% in Spain, 35% in the Netherlands and 68% in Italy, which is a bit more like us. A large number of claims management companies actively encourage claims after even minor crashes, thereby potentially exacerbating the problem. The magnitude of costs that insurers inherit from whiplash claims are often passed on to consumers through higher insurance premiums, raising the cost overall.

In February 2017, the Government announced a robust package of reforms to crack down on minor, fraudulent and exaggerated whiplash claims. The measures will be introduced in a civil liability Bill in due course. Subject to parliamentary time and consideration, the Government aim to implement the whiplash measures as a package in April 2019. It is estimated that the reforms will bring down the cost of motor insurance by around £35 a policy. Leading insurers, such as Aviva, have publicly committed to passing on savings through lower premiums. Motor insurance operates under something of a cloud, as we recognise, and has often been criticised on competition grounds, as colleagues have noted. In many ways, however, it is an intensely competitive industry, and insurers will have be under pressure to pass on savings or risk being priced out of the market. We as the Government will monitor the industry’s reaction to the reforms and will consider further action if required.

I want to pick up on some of the points that Members have raised, which include some important issues that are collateral to the petition, but are important for us to touch on. The hon. Member for Clwyd South mentioned that she had three key tests for legislation in this area. The first was the effect on costs, the second was the effect on the innocent party and the third was whether it would help or hinder road safety. I hope she will recognise that one of the unintended consequences might be to push up the cost of personal injury claims. The UK is famed for its relatively high level of personal injury claims, which is one reason why it yields whiplash claims. Those claims are one of the things funded by insurance premiums. The downside is higher costs, and we have identified that problem, but the upside is that personal injury claims tend to get paid out at a higher level in this country. We are keen to ensure that the link between driver insurance and driver behaviour is maintained precisely to maintain personal accountability.

The hon. Lady, like the hon. Members for Darlington (Jenny Chapman), for Kilmarnock and Loudoun (Alan Brown) and for Reading East, was absolutely right to note the high cost of young people’s insurance claims and the higher risk that young people face in their motoring. In answer to the question raised by the hon. Member for Reading East, I cannot comment on what the coalition Government did or did not promise about a Green Paper, but I can tell him that these issues are of enormous interest and importance to the Government. We have commissioned a lot of work under our Driver 2020 programme, which is specifically designed to explore different forms of intervention that can bear on young people and improve their driving and therefore their insurability. That includes work on hazard perception, simulated training, education, parental engagement, data recorders, telematics and the rest. That is important.

To respond to the hon. Member for Darlington, we absolutely have not ruled out some form of graduated driver licence. We do not think it is the right policy at the moment, but we are looking at it. As she acknowledged, there are different forms of GDL, and it is important to be specific about the elements that might be brought in. It is not policy, but as she has said, and as the Prime Minister has said, we are considering that for precisely this reason. It falls into a wider desire across Government and certainly on my part to reduce the risk to young drivers, particularly in rural areas.

In my county of Herefordshire, I went to an extraordinary demonstration organised by the local fire service called Dying 2 Drive. It is run in connection with the ELY Memorial Trust, which is a wonderful local charity dedicated to helping prevent road accidents for young people. It is the most petrifying experience. Young people in sixth forms are exposed to a road traffic accident with fatalities right there. The situation in front of them is then solved through an intervention by the fire service and the police. It is a very moving experience. It is very hard to see it and drive without great care and attention thereafter, and the evidence is that it is very effective. I would like to see it rolled out by all kinds of fire services. It underlines the wide range of interventions that can be used to try to help this problem of young people at risk on our roads.

I will pick up a couple of other points that have been made. Adverse consequences are a theme that everyone has rightly touched on. We all recognise that the cost of premiums is higher than we would like, particularly for certain groups in society. We are determined to adopt a series of reforms—I have talked about whiplash and the work being done on young people—to try to reduce the high premiums and their impact on particular groups, but we have to be aware of the law of unintended consequences and the danger that such reforms may inadvertently drive up costs and premiums. Costs may be reallocated to people in a way that undermines the incentives to drive well and drive safely. It would be a disaster if we had those counterintuitive and counteractive results.

I am grateful to all Members who have contributed and to the hon. Member for Clwyd South for introducing the debate.

[Alan Brown]

I thank the Minister for giving way just as he was finishing. In terms of the costs for young drivers, I mentioned the fact that the extra 12% insurance premium tax is a further hurdle for those drivers to overcome. Could the Government look at reforming that?

[Jesse Norman]

It is hard to respond to that question, because it is about a tax and is therefore handled by the Treasury, rather than my Department. Also, it is not a tax that falls specifically on young people, but on the industry as a whole. As with any tax, one should consider not only the tax but the things it is intended to pay for and might be paying for, whether that is reducing debt or funding public services. The point I would make to the hon. Gentleman is that over the past few years the Department has pioneered a continuous insurance enforcement system that has significantly reduced the number of uninsured drivers by some 40%. Again, we take the point about the concern, but we specifically want to address the cause of it, which is the number of uninsured drivers. That is the core point of the remark.

To wind up, I am grateful to colleagues across the House and the hon. Member for Clwyd South for introducing this debate. I am grateful to the Petitions Committee for putting it on our docket. We all recognise that the cost of car insurance is an important issue for all motorists. That is why the Government are committed to the things we have discussed tonight: tackling fraudulent whiplash claims, working with the motor insurance market, keeping premiums as low as they can be and addressing the risks and concerns that relate to young people and those in rural areas. I hope on that basis that the House will be satisfied.