The Association of British Insurers’ announcement that motor insurance premiums hit their highest recorded levels at the end of last year is another reminder that change is long overdue in the personal motor market. That’s coming but will it be enough? First up is the Prisons and Courts Bill, which seeks to bring premiums down by around £40 a year by tackling the whiplash epidemic. This will see a ban on claims without medical evidence, an increase in the small claims track from £1000 to £5000 for road traffic accidents, and new fixed tariffs to cap whiplash pay-outs. Frequency of whiplash claims will be unaffected but on the face of it, subject to the emergence of new business models or displacement, the cost will be reduced for insurers.
Unfortunately, the reforms don't really go far enough. The provision for a 20% uplift on undefined 'exceptional' claims will drive inappropriate behaviours while the tariff scale will enable claimant firms to carve out profit from these claims through conditional fee agreements.
Any positive shift on claims costs provided by the whiplash reform is overshadowed by the change to the discount rate. By slashing the rate from 2.5% to minus 0.75%, PWC have estimated that the additional cost to the motor insurance consumer will range from £75 for the average motor consumer to £1,000 for higher risk drivers.
Insurers gained some reassurance, with the acknowledgement by the Treasury that the discount rate should be set at a level that is fair to consumers as well as personal injury claimants. We now await the outcome of the upcoming consultation to see whether this balance will be struck.
Further change comes as a result of the Vnuk ruling. Although the EU is currently considering how this will be factored into the motor insurance directive, the Motor Insurers' Bureau (MIB) could find itself having to compensate victims of accidents involving vehicles not currently covered by motor insurance. This could potentially push up the MIB levy, with implications for motor premiums.
Even greater change is on the horizon with the arrival of autonomous vehicles. Keen to support this new type of technology, Chancellor Philip Hammond committed £390m of funding in his Autumn Statement to boost the development of low carbon and autonomous vehicles.
Certainly, autonomous vehicles represent a positive step for motorists and insurers. Removing human error from the UK's roads will significantly reduce road traffic accidents.
However, new risks will emerge for insurers as the technology evolves and when there is a mixture of autonomous and driver controlled vehicles on our roads.
If an accident happens due to a defect with the autonomous technology the motor insurer will, in the first instance, deal with any claims – including potentially an injury claims from the driver of the vehicle. It's uncertain how manufacturers will respond when insurers chase them for compensation, especially when they will hold all the vehicle data. There’s also the scope for new types of fraud to emerge; without access to data, what's to stop the driver saying their vehicle was in autonomous mode when it crashed, causing them injury, when they were actually in control and just took their eye off the road? Resolving these issues will clearly be essential.
The motor insurance industry is facing the most significant period of change in its history. With that comes uncertainty but also the potential for some extremely positive outcomes for motorists and the insurance industry. Fewer accidents and curbs on the UK's compensation culture are worthy destinations.
To reach these, we must keep our focus on the consumer, whatever challenges are presented. Mobility is essential for the UK's consumer and its economy; ensuring motor insurance is affordable and fair is a must. That means managing claims frequency and cost. In a highly competitive market insurers will do all they can but ultimately effective and balanced Government intervention is needed to address some significant societal issues. The motor insurance consumer should ask themselves whether that has been delivered so far.
Tony Newman, head of motor claims, Allianz Insurance
This blog first appeared in Post Magazine 18 April 2017.