Laura Hodgson

These are difficult times for motorists. The price of fuel has reached astronomical levels in the past year and motor insurance premiums are reported to have risen by as much as 40% in the year ended 31 March 2011. As motoring has become one of the most expensive household costs in the UK, the motor insurance industry has come under closer scrutiny. In September 2011 the Office of Fair Trading (OFT) issued a call for evidence to establish the background to the rise in motor premiums, and Member of Parliament for Blackburn, Jack Straw, has introduced a private member's Bill (the Motor Insurance Regulation Bill 2010-11) with the aim of reforming the regulation and operation of the motor insurance market.

In addition to establishing the reasons for the increase in car insurance premiums, the OFT's investigation is designed to identify any consumer and competition issues that need to be addressed to improve the functioning of the motor insurance market. At this stage, the OFT is asking insurers and other stakeholders for their views on a number of aspects of the private motor insurance market that may raise competition and consumer issues, including:

Whilst the OFT is still investigating the rising cost of premiums, the Motor Insurance Regulation Bill was introduced into the House of Commons on 13 September 2011. When introducing the Bill, Jack Straw gave his own opinion on the root of the price hike. According to Straw, the principal reason for the increase is the extraordinary rise, in both number and value, of personal injury claims. As the rise has coincided with a reduction in the number of road traffic accidents reported, this suggests that the increase in claims has been artificially generated by a claims industry.

Problems with motor insurance claims have already been identified in an Association of British Insurers' (ABI) paper entitled Tackling the compensation culture: the Legal Aid, Sentencing and Punishment of Offenders Bill, which advocated the full implementation of the recommendations set down by Lord Justice Jackson in his report on reforms to the compensation system. The ABI paper suggested that whilst the Legal Aid, Sentencing and Punishment of Offenders Bill goes a long way to meeting Lord Justice Jackson’s objectives, the Government should move to tackle disproportionate costs by banning the receipt and payment of referral fees. The Government has now signalled its acceptance of one of the fundamental propositions of the Motor Insurance Regulation Bill, under which it will be unlawful to solicit, offer or pay a referral fee relating to a personal injury road traffic claim.

Amongst other changes, the Motor Insurance Regulation Bill aims to make it significantly more difficult to claim for whiplash injuries (which account for 80% of motor claims) by establishing new standards relating to the evidence required and damages payable. Some jurisdictions restrict the payment of damages for whiplash to claims where there is clear objective evidence that real injury has been suffered. Essentially, the Bill provides for the introduction of the requirement for such objective evidence in the UK.

The Bill will also look to prohibit insurers from isolating the level of risk arising from personal injury claims to an area smaller than Wales, or a standard English region. The measure is intended to prevent postcode discrimination whereby insurers price risk based upon the insured's home address.

Many of the Bill's recommendations should result in lower costs for insurance companies and, assuming that these savings are passed onto the consumer, the cost of motor insurance should decline.

Against the wider development to reduce the cost of motor insurance premiums a recent case decided by the European Court of Justice, Association Belge des Consommateurs Test-Achats ASBL and others (Case C-236/09), is anticipated to result in increased premiums for certain motorists. The judgment has outlawed gender based insurance pricing from 21 December 2012 which the insurance industry has said will require a rise in premiums for women motorists who have previously benefited from lower cost policies as a result of being deemed a lesser risk on the road. This change, coupled with proposals to ban postcode discrimination (as outlined above in the Motor Insurance Regulation Bill), may reduce the means by which insurers can price motor insurance according to established risk factors.

With motor insurance under greater scrutiny and providers' pricing methods being challenged, the next few years will require the industry to pay close attention to regulatory and legislative developments and ensure that changed pricing will not undermine ongoing profitability.