Economic market developments 2005

I.1 Market statistics

1.1 In 2005, the latest year for which market figures are available, total net written premiums for motor increased by 2.4% to £10,421million. Total outgoings for the motor sector (claims, commission, expenses and changes in reserves) increased by 3.4% to £10,610 million. In 2005 the underwriting loss increased to

£189 million, compared with a loss of £74 million in 2004.

1.2 According to the widely quoted AA British Premium Index, there has been a fall of 3.6% in average motor premiums in 2005 as against an increase of 2.8% in 2004.

1.3 Private car claims frequency amounted to 17.5% in 2005 (18.4% in 2004). The claims frequency in respect of commercial motor business has fallen again, to 30.8% in 2005 (32.6% in 2004). There was a further increase in the cost of motor theft claims, rising by just over 4% to £600 million in 2005. The number of settled theft claims was up 6.7% to 412,000 in 2005 compared to 386,000 in 2004.

1.4 Profitability of the motor sector improved as investment income more than covered the minor underwriting loss in 2004. Current claims data shows a positive outlook for 2005 results with claims ratios continuing to fall against an increase in exposure over 2004. Future trends will depend on the degree to which claims and premium inflation changes.

I.2 Trends in market structure

1.5 RBS group remains the largest private car insurer in 2005. Five insurance groups account for 67.4%

of the private car insurance market. The market share of the top five commercial motor insurers also remains high, at over 69.3%. Independent intermediaries wrote 36% of motor insurance and direct sales accounted for 45%, the remainder being sold via company agents, banks, building societies and others.

1.6 There are over 600 insurance companies authorised to transact general insurance business in the UK.

In practice, there are around 67 companies and 13 Lloyd’s syndicates actively transacting motor business.

II.Important events and issues

II.1 Uninsured driving

2.1 There has been good progress in implementing the recommendations in the report of Professor David Greenaway of Nottingham University on tackling uninsured driving including:

-legislation to allow the Motor Insurance Database (MID) to be used to target insurance evaders by means of roadside cameras, and

-legislation to enable the police to confiscate the vehicles of insurance offenders.

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2.2 The new powers to confiscate uninsured vehicles have been warmly welcomed by the police;

thousands of uninsured vehicles have been seized and destroyed. The initiative has attracted good publicity, which should act as a further deterrent to uninsured drivers.

2.3 Legislation is currently before Parliament to introduce a new offence of being the keeper of an uninsured vehicle (i.e. additional to the offence of being the user of an uninsured vehicle). The keeper of a vehicle is the person listed on the Government’s vehicle database. The new offence will enable keepers of uninsured vehicles to be prosecuted automatically from the record. Again, this will serve as a deterrent to uninsured drivers.

2.4 Both the new offence of being the keeper of an uninsured vehicle and the use of roadside cameras to detect uninsured vehicles will rely on the MID being up to date. Professor Greenaway initially called for the MID to be updated in ‘real time’ by 2008. Research commissioned by the ABI suggested that real time updating was unnecessary to achieve a database that was fit for the purpose intended and that a seven-day updating period would be sufficient in most cases. The UK Government has formally accepted this update period, which the insurance industry has committed to meet by the end of 2007.

2.5 Actions to help to make insurance more affordable for young drivers - an issue highlighted in Professor Greenaway’s report - are explained in more detail in paragraph 2.20 – 2.22 below.

II.2 Claims environment

2.6 In May 2004 an influential non-governmental task force, published a report – Better Routes to Redress - about the so-called compensation culture in the UK. This report found that the perception of a compensation culture was detrimental to the UK economy and recommended action on several fronts, notably:

• regulation of claims handling companies

• increase in the small claims court limit

• more systematic use of rehabilitation in injury claims

• more use of mediation and arbitration in injury claims, and

• a more informed attitude to risk among schools and hospitals.

2.7 In November 2004 the Government accepted most of these recommendations and indicated it would work on a wide-ranging programme of reform in 2005 designed to meet these aims. The insurance industry welcomed this approach and will be a key player in these reforms.

2.8The industry’s objectives are to see reform aimed at:

• restoring public confidence in the process because it provides access to justice for genuine claims

• resolving genuine claims quickly and fairly without unnecessary dispute

• promoting effective rehabilitation

• keeping transactional costs to an efficient level

• effectively and proportionately regulating claims advertising and claims handling, and

• encouraging sensible management of risks in the economy at large.

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2.9 The ABI launched its campaign for reform of the personal injury compensation system in December 2005 with its “Care and Compensation” proposals. The current claims process is inefficient, lengthy and encourages adversarial behaviour. This process also creates disproportionate costs. The proposals call for radical reform of the system, which would ensure that the process is quicker, more efficient and puts the claimant at the heart of the system. The ABI is currently working with the British Government and other stakeholders to design a streamlined process.

2.10 The proposals also focus on reforming rehabilitation to improve the quality and quantity of rehabilitation and occupational health care in the UK. The ABI is currently working on a stakeholder best practice guide for health in the workplace, proposals to provide accreditation of services, and proposals to remove the fiscal disincentives that deter employers from providing care for their employees. The ABI’s attention has been mainly focused on the British Government, although in April, we participated in a CEA lunch for Members of the European Parliament to discuss how to improve workplace health. In October, the ABI will host its second health conference, themed on improving the health of the working population.

2.11 The possible harmonisation of civil liability of drivers for injury to vulnerable road users (e.g. pedestrians and cyclists) is an ongoing issue within various EU fora. To help inform its own policy development, the ABI is commissioning research into the potential impact that such a change may have in the UK. The research will analyse the potential impacts on road safety, compensation claims, risk pricing and fraud. The researchers will be seeking to gather information from those countries that may have experienced a similar change to their own legal liability regimes.

II.3 Regulatory environment

2.12 The ABI is pressing the UK Government to publish its proposals to implement the Fifth EU Motor Insurance Directive, which has to be implemented by June 2007. It is envisaged that the Government will propose a new minimum third party property damage amount of £1,000,000 (currently £250,000).

2.13 The UK Government has made a commitment to exercise the Member State option under the Equal Treatment Directive to permit gender-based differences in motor insurance premiums and benefits. Draft Regulations to implement the Directive will be published in the autumn, along with a Government Green Paper on discrimination in general. The ABI is seeking to ensure that any additional regulatory burden on insurers is minimised and that the obligation on Member States to publish data in support of the opt-out can be met from existing sources.

2.14 The Department for Transport has agreed to the ABI’s request to allow insurers to deliver certificates of motor insurance to customers electronically. The Department will issue a consultation document on the changes that will need to be made to the Road Traffic Act. As well benefiting customers, the facility will result in cost savings to insurers.

2.15 The ABI worked closely with the CEA on a response to the Commission’s study into insurance problems associated with accidents involving trailers. The issue is likely to be addressed during the discussions on a Sixth EU Motor Insurance Directive. The ABI hopes that solutions can be found that that will address the concerns of victims of accidents involving trailers, while taking account of the different liability, insurance and trailer registration systems that exist in Member States. Meanwhile, the EU Commission has noted that trailers do not have to be insured when they are not attached to a towing vehicle when in the UK. The ABI has argued that there is no public policy rationale for change.

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II.4 Risk pricing

2.16 Work has continued on the review of the car group rating system, the process that seeks to evaluate the relative risk characteristics of different car models for the benefit of insurance underwriters. The review has been prompted largely by the need to ensure that the group rating system keeps pace with changes in vehicle design and construction, and recognises the welcome overall reduction in the incidence of theft claims in the UK over the past 10 years. The new system is due to come into force at the end of 2006, but will run in parallel with the existing system for at least a further year. One of the main changes will be an increase in the number of car rating groups - from 20 to 50.

II.5 Tackling fraud and crime

2.17 The Code of Practice for the disposal of motor vehicle salvage is supported by the ABI and a number of other organisations, including salvage professionals, the police and Government agencies. The Code gives guidance on steps to be taken to prevent the illegal use of vehicle salvage and the return of badly repaired vehicles to the road, thereby presenting hazards to public safety. The Code is currently being revised to take account of new regulatory requirements and to ensure that it continues to meet the needs of interested parties. The new Code is due to be issued before the end of 2006.

2.18 July 2006 saw the launch of the UK general insurance market’s Insurance Fraud Bureau (IFB). The organisation uses existing shared insurance data proactively to detect and investigate organised insurance fraud. The IFB, which covers 97% of the motor insurance market, also analyses data from household and personal liability policies to investigate organised fraud.