Cost of Motor Insurance

Sarah Wollaston Excerpts

Tuesday 8th November 2011 Commons Chamber

[Iain Stewart (Milton Keynes South) (Con)]

As a member of the Transport Committee, I am pleased to have an opportunity to take part in the debate. I pay tribute to the hon. Member for Liverpool, Riverside (Mrs Ellman) for introducing the Committee’s report so ably and comprehensively. I do not intend to speak for long, but having spent a considerable time examining the issues, there are a few points that I would like to place on the record.

Two weeks ago two events happened to me that crystallised in my mind the facts that we are debating tonight. First, I received in the post my motor insurance renewal notice from my insurance company. I can assure the House that it was not a happy moment in the Stewart household, because my premium had shot up by the order of 25%. I shopped around a little and got a slightly better quote, but it was still a substantial increase on last year, despite my having had no accidents.

Secondly, no sooner had I signed up to the new policy than I got a text message suggesting that as I had had an accident in the past three years, perhaps I required assistance to claim compensation. As I said, I had had no such accident. It strikes me that those two experiences, which I am sure have been shared by thousands, if not millions, of people up and down the country, are not unlinked.

Although I accept that, as the Select Committee’s report sets out, there is a range of reasons why insurance premiums have gone up considerably in recent years, from the evidence that I saw as part of our inquiry, together with private discussions that I have had with some insurance companies, I am convinced that it is referral fees for personal injury claims and the activities of some claims management companies that have been a significant contributor to the growth of those premiums.

I do not doubt that there may be perfectly respectable claims management companies, but I am of the view that the current arrangements whereby lawyers and others can pay and receive fees for referring personal injury claims has created an industry that pursues claimants for profit. Although I do not want to see anyone who has a genuine claim denied proper compensation, far too often those proper boundaries are breached and there is a financial incentive throughout the system to exacerbate claims or make fraudulent ones.

It has been difficult to obtain exact figures, but there is certainly an average sum of several hundred pounds in each claim which sloshes around the system in ways that are very opaque. The cost, of course, is picked up by the policyholder. This creates a double problem. For the honest motorist, that pushes up premiums at a time when many households are struggling to meet the cost of living.

[Dr Sarah Wollaston (Totnes) (Con)]

Further to the unfortunate shock that happened in the Stewart household, may I tell the House about the unfortunate shock in my household when I received a notice saying that I did not need to take any further action to continue my insurance with Tesco, but the small print indicated that the premium had gone up from £900 to £5,700 as I am the parent of a 17-year-old boy? It is a further sharp practice that the small print is not there, and it would have been very easy to miss the fact that I could have spent nearly two months’ salary on insuring my 17-year-old boy. I think everybody in the House would agree that it would be entirely unreasonable and very difficult for anyone living in a very rural area, as I do, for my son not to be able to drive.

[Iain Stewart]

My hon. Friend makes a powerful point. The shock in my household cannot even begin to compare with that in Totnes. She raises an extremely important point. Many of us will pay our motor insurance premiums by a monthly direct debit, and among all the paperwork that we receive it is very easy to say, “Yes, we’ll continue with that policy,” and then suddenly the premiums that we are paying shoot up. I echo her call for much more transparency and explanation on the renewal documents about what the new cost will be.

The first problem I identified is that the premiums go up, placing a strain on households that have tight incomes, but another problem is that premiums are pushed up to such a level that other, less honest motorists seek in some way to evade paying their insurance, and other Members have alluded to that. They will either not have insurance at all, or they will in some way make fraudulent claims on their insurance policies to try to minimise payments. That creates a vicious cycle; the more people evade payment or misclaim on their policies, the higher the costs that honest motorists have to bear.

The destination of those fees and the routes by which they travel are far from clear, but I have been surprised to learn of some of the organisations that potentially gain a sizeable income from referral fees. For example, it has been suggested to me that trade unions receive significant income, either directly or through benefits in kind, from referral fees. I have been unable to quantify that, but Lord Justice Jackson states in his review of the cost of civil litigation:

“Trade unions refer the personal injury claims of their members to solicitors on union panels…For example, one union informs me that it receives a referral fee of £200 for every case which proves to be “worthy of investigation”. Other trade unions do not charge referral fees as such, but instead receive certain free legal services from solicitors for their members.”

I am in no way suggesting that that is wrong, but it illustrates the opaqueness of the system and the fact that money can be distributed in ways that people might not first realise. For that reason, I am glad that the Government have taken action to ban referral fees through the amendments made last week to the Legal Aid, Sentencing and Punishment of Offenders Bill.

I would be grateful if the Minister could clarify one point on that—I appreciate that it was not his Bill and that he might wish to speak with the Under-Secretary of State for Justice, my hon. Friend the Member for Huntingdon (Mr Djanogly) about it. The new clause added to the Bill last week defined payment for referral fees as “any form of consideration”. I presume that that will include the offset models to which I have referred, where legal services are traded rather than cash, but I would be grateful for clarification.

I strongly believe that the ban on referral fees will help to strip out some of the unnecessary costs in motor insurance. There is a balance to be struck between providing fair access to justice and having a system that is wide open to abuse in a “something for nothing” culture. I believe that the pendulum has swung too far in the latter direction and I am glad that the Government have taken action on referral fees. However, as the Transport Committee’s report recommends, there are many other causes behind the rising cost of premiums and they often cut across Government Departments.

In conclusion, I urge the Government to take on board the motion’s final recommendation, which is also set out in the Committee’s report. A cross-departmental ministerial committee should be set up to consider further ways of reducing the cost of motor insurance.