Justice minister Lord Faulks, speaking at the recent APIL (Association of Personal Injury Lawyers) June conference, earned a few derisive remarks from his audience when he insisted that insurers were signed up to passing on 100% of the savings made from reforms to personal injury to customers.
The Government is naive or deluded if it believes customers are going to get £50 knocked off their insurance premiums if these reforms go through. To date, only Aviva and LV= have publicly committed to doing so, in the official government press release. There has been a deafening silence from most of the car insurance industry.
The fact is that, whatever the Government thinks, insurers have a fiduciary duty to maximise the financial returns for their shareholders. For the record, there is nothing wrong with that. That’s just plain old commerce, but the government has ignored this obvious inherent conflict.
The insurance community will demur, but the fact is that motor premiums have risen during the last 18 months and continue to rise despite the recent measures the government took to reduce the costs of pursuing a compensation claim against an insurer, principally through significantly reducing solicitors’ fees. LASPO, Medco and other reforms designed to reduce the cost of claims have barely had time to bed in since they became law in 2012-13.
The pricing of a premium is complex. The price a customer pays for car insurance is impacted by a multitude of factors, and it will be impossible for the government or anyone else to attribute any increase or decrease in car insurance premiums to any one factor.
Of more concern to the regulator, consumer groups and the media is the scandalous treatment of consumers when they come to renew their annual insurance, and where the new premium often increases substantially, and for no apparent reason. Why isn’t the government focusing attention on this issue, especially where auto-renewals for the elderly and vulnerable are concerned?
Insurer activity at policy renewal stage was troubling enough to force the Treasury Select Committee to write to the FCA and ABI in 2013.
Investigations undertaken by a number of independent organisations found numerous examples of insurers offering auto-renewal terms at rates very much higher than the previous year, and without justification. When challenged the insurer immediately and substantially reduced their quote to a level comparable to the prior year premium. And it isn’t just car insurance.
I renewed my 89-year-old great Aunt’s home insurance policy and, using an online aggregator, I managed with a few clicks to reduce her premium by 75%. Previously she had been subject to year on year increases, without any claim having been made.
The insurers will doubtless argue that the motor insurance market is highly competitive, and like all mature markets not subjected to a monopoly, they are right, it is. But their behaviour with regard to renewals doesn’t hold out much confidence that they can be trusted to pass on any savings directly to their customers.
Further recent research produced by the online aggregator, Comparethemarket, states that those customers of insurers who are loyal and stay with their insurer are paying on average a loyalty tax of £119, and that the average renewal premium compared to the cheapest comparable policy on the market had risen from £96 to £119 in just 12 months.
Car insurance is the only industry we can think of where customer loyalty is rewarded by an increase in annual premiums, as opposed to a reduction. Price competition has painted car insurers into a corner, because ever-decreasing levels of retention have put a premium (literally) on acquiring new customers each year, and aggregation has encouraged customers to shop around.
Lower prices for new customers means insurers have to penalise their loyal customers to close the revenue gap. It is no wonder that insurers struggle to generate public trust. While most acknowledge this loyalty paradox, no one insurer can reverse their acquisition policy, and increase new business premiums, without being killed in the marketplace.
If the government wanted to do something useful, that would benefit millions of motorists at a stroke, it would work with the regulator and introduce new rules to help insurers – as a whole – get out of the trap they have made for themselves.
Auto-renewal is a scandal that is crying out for ministerial intervention. Instead, the government has ducked the issue, choosing instead to sweep away the rights of millions of people to seek redress for soft tissue injuries caused by an accident that wasn’t their fault, and bribing motorists to look the other way with the uncertain promise of £50 off their motor premium.
Note: Martin Coyne is chairman of Access to Justice, and Andrew Twambley is a member of the executive committee.