Cost of motor insurance

In this report we follow up the Government’s response to our March 2011 report on the cost of motor insurance and also deal with new developments in this area, including the Government’s decision to ban referral fees relating to personal injury cases.

In relation to the ban, we echo doubts expressed at Report Stage in the House about its efficacy, particularly once rules restricting the ownership of law firms are relaxed.

However, we recommend that once the Bill is enacted the Government should prioritise the implementation of the ban on the receipt of referral fees, which could prohibit insurers from receiving referral fees across the board rather than only in relation to legal action.

One way to help reduce premiums may be to consider whether the legal costs of low value claims processed using the pre-action protocol and online portal are reasonable. We recommend that the Government review how the protocol and portal have operated since they were introduced last year and publish the results within six months.

The rise in personal injury claims, most of which are for whiplash injuries, is the main reason for the rise in premiums. It is difficult to diagnose whiplash objectively and this has deterred insurers from defending claims in court. We recommend that the bar to receiving compensation in whiplash cases should be raised. If the number of whiplash claims does not fall significantly as a result there would in our view be a strong case to consider primary legislation to require objective evidence of a whiplash injury, or of the injury having a significant effect on the claimant’s life, before compensation was paid.

We recommend that the Government send a clear message to the insurance industry that it expects the data protection legislation to be fully respected and we echo the recommendation of the Justice Committee that the stricter penalties for breaching the Act, passed by Parliament in 2008, should be brought into force. We also call on the Government to initiate an investigation of cold calling intended to generate personal injury claims, with a view to examining the legal and regulatory options for curtailing this activity.

The House recently agreed to a resolution on the cost of motor insurance based on our earlier report, which called for the establishment of a cross-departmental ministerial committee on reducing the cost of motor insurance and the publication of a plan for dealing with the different aspects of the problem. We call on the Government to explain how it will implement this resolution.

We also followed up our previous recommendations on uninsured driving and fraud.

Earlier recommendations on young drivers will be followed up in our forthcoming inquiry on road safety.

Motor insurance premiums are rising rapidly, despite the long-term trend towards there being fewer casualties from road accidents. Young drivers, in particular, must pay particularly large insurance premiums. The high cost of motor insurance can cause a number of policy problems for the Government to deal with, for example it can:

• adversely affect the lives of people who depend on their cars to get to and from work and for social reasons, particularly in areas where the provision of public transport is limited; • encourage some people to drive without insurance; and • increase the incidence of insurance fraud.

There is general agreement that premiums have increased because of the increased number of personal injury claims arising from road traffic accidents. Motor insurance premiums must now pay for compensation for personal injuries and legal costs on a far greater scale than before. Although we welcome wider access to justice, it should not provide an opportunity for people to make fraudulent claims for non-existent or pre-existing injuries.

We call on the main players in the insurance industry to do more to tackle fraud, including by funding a dedicated police unit on insurance fraud, and we expect the Government to help in achieving this. We also call on the Government to specify more precisely when insurers will be enabled to gain access to DVLA information about drivers purchasing insurance.

Referral fees are a feature of the insurance industry, with fees being paid and received by insurers, solicitors, claims management firms and others. The Government is currently considering a recommendation by Lord Justice Jackson’s review of civil litigation to ban or cap referral fees. This issue has ramifications which extend beyond the scope of our Report.

In our view, where referral arrangements exist they should be more transparent to consumers and we make detailed recommendations to achieve this.

Uninsured driving is beginning to decrease because of better enforcement action by the authorities, supplemented by the recent introduction of a scheme for the registered keepers of uninsured cars to be warned and fined by the DVLA. We recommend that the new scheme should be accompanied by a promotional campaign, aimed at young drivers, to alert them to the requirement to have valid motor insurance. We also recommend that the penalties for the offences relating to uninsured driving be reviewed next year.

We recommend that the Government’s forthcoming road safety strategy should aim to bring down the casualty rate amongst young drivers. We welcome the Minister’s commitment to making the driving test more rigorous and exploring other ways of ensuring that young drivers are well trained but the proposals in this area are not new and the debate does not seem to have moved on since our predecessors looked at this issue in 2007. We recommend that specific proposals be published for consultation within the next six months, with a view to changes being implemented during this Parliament.