Motor insurance premiums have increased by around 40% in the 12 months prior to 31 March 2011 and the OFT hope that by understanding the facts and reasoning behind the increases that it can identify where the market can be improved.

A focal point will be Northern Ireland where premiums have been notably higher than the rest of the UK.

Otto Thoresen, Director General of the Association of British Insurers, claims that the motor insurance industry has not been profitable for the last 16 years.

He welcomed the news saying: “This will give the industry another opportunity to highlight the cost pressures motor insurers are facing, what action is needed to reduce them, and steps the industry is taking to ensure customers get the best deal when buying motor insurance.

“Rising claims costs from personal injury claims and excessive legal costs, insurance fraud and uninsured driving, coupled with lower investment returns in recent years, have unfortunately led to rising motor insurance bills for many customers.

“Insurers are acutely aware of the impact that higher motor insurance premiums have for their customers. This is why the industry is doing everything possible to reduce costs, for example by campaigning for compensation reform to tackle excessive legal costs and frivolous claims, and setting up the Insurance Fraud Register to further reduce fraud.”

Working with the Ministry of Justice and the Financial Services Authority, the OFT will look into the effect of price comparison websites and the provision of credit hire replacement vehicles to drivers who are involved in accidents that are not their fault amongst other factors.

In a poll carried out by What Car? magazine, 84% of motorists say their car insurance has risen in the last 12 months.

Respondents revealed that their premiums have jumped 33% on average. The Association of British Insurers (ABI) has blamed the increases on uninsured drivers, fraudulent claims and legal fees that come with settling personal injury claims. These amount to an average increase of £112.

Jim Holder, editor of What Car?, said: ”We’re in danger of getting caught in a Catch 22 situation, where insurance premiums rise as a result of insurance fraud, which in turn makes it more tempting to risk driving without insurance.

“For instance, at present the punishment for driving without insurance doesn’t fit the crime.

“One in 20 drivers is estimated to be on the road without insurance, but when a typical fine if they get caught is £200 and six points on their licence, you can almost understand the temptation. Young drivers with clean licences typically pay over £2000 for insurance.”

Only 16% of those surveyed in What Car?’s research said their insurance had become cheaper.

High street insurer Swinton quizzed 1,200 motorists and found that 27% of them admitted to coasting in a conscious bid to save fuel.

Just under a fifth of those (19%) didn’t consider coasting to be dangerous.

“We’re concerned that motorists are sacrificing safety in an attempt to save on fuel costs,” said Steve Chelton, Insurance Development Manager at Swinton Car Insurance.

“The cost of getting into an accident, which could then lead to a car Insurance claim, is definitely greater than whatever marginal savings in fuel costs you will get from coasting or not using your car lights.”

Drivers have also resorted to less risky measures to cut fuel consumption. Silence is golden for 8% of drivers who admitted to turning off their car stereo while 17% of motorists said they would wind down a window instead of flicking on the A/C.

Swinton Insurance stressed that coasting can compromise the effectiveness of the footbrake and result in less responsive steering, particularly on bends and corners.

Vehicle speed downhill will increase rapidly while it may be more difficult to select the appropriate gear when needed.

Parts of the country have recently seen a spate of vehicles stolen by thieves on the prowl for vehicles left unattended with the keys in the ignition. Lancashire police recently logged 27 vehicles left in this way over just two hours. Earlier this week, in just one morning, four cars were stolen this way in Greater Manchester alone. Last year, a gang of car thieves known as The Ice Bandits received prison sentences.

Leaving your vehicle unattended with the keys in the ignition could be seen as not taking reasonable care, and might invalidate any insurance claim if your vehicle is stolen in this way.

Nick Starling, the ABI’s Director of General Insurance and Health, said:

“No one wants to freeze while defrosting their car. But tempting though it is, specially on freezing mornings, don’t leave your vehicle with the engine running to warm up, while you nip back inside – even if it is only for a couple of minutes, as it only takes seconds for thieves to strike. Stay with your vehicle while it warms up, so that it is you that drives away in a warm car, not a thief.”

Maggie Craig, the ABI’s Director of Life and Savings and Director of Consumer Strategy, said:

“We are delighted to appoint an industry expert of Pete’s calibre to the ABI team. Pete has over 20 years experience of the industry with three major companies and has worked in sales, strategy and distribution. His appointment reflects the importance that the ABI, and the whole insurance industry, places on ensuring that consumers are at the heart of all we do.

“A key part of Pete Jolly’s role will be to lead the ABI’s work on implementing the Retail Distribution Review, making sure that it succeeds in delivering high quality, appropriate advice to as wide a range of consumers as possible. Pete’s knowledge of the life industry will stand him in very good stead in taking this work forward, and in developing the ABI’s Consumer Strategy.”

Peter Jolly said:

“I’m very pleased to have been given this opportunity to take forward the ABI’s important work on improving customer experiences of insurance. It will be a challenging role, at a particularly challenging time for the whole financial services sector, and I look forward to using my experience in the best interests of the ABI’s member companies and, most importantly, their customers.”

“We have come a long way in improving customer outcomes. We have been competitive and innovative to the customers’ great advantage. But we have further to go.

“The risk in recession is that customer satisfaction will not improve as the focus on costs intensifies. As you know, fraud is increasing. Detected fraud increased in volume by 17% between 2007 and 2008, with in excess of 100,000 cases detected. The industry is bearing down on those it suspects. Rightly so. The challenge is not to alienate the honest customer in doing so.

“Other risks are rising too and bringing new challenges for the relationship with customers. The greater risk of unemployment was pushing up rates for mortgage payment protection insurance earlier this year, to the dissatisfaction of the regulator.

“And the search for new customers in a stagnant market makes existing customers wonder what is going on. The word on the street is that it is always better to switch. That creates a challenging market. Why, I am asked, does the industry not put as much effort into loyalty and retention as into switching?  Now I know many do but that is not how it seems out there.

“And of course the growth of price comparison through the internet has intensified the focus on price. The FSA is asking more and more questions about the websites. As always their concern is about customer expectations. The internet policy and the policy sold over the phone by the same firm are not always identical. Why should they be if one is cheaper than the other? Because the customer expects them to be the same.”

The Association of British Insurer’s profile page

The agreement is a response to FSA Chairman Lord Turner’s comments on MPPI at the ABI’s Biennial Conference in June 2009, where he expressed concern about increases in premiums, or reductions in cover, on MPPI policies during the recession.

The financial services industry has reached this agreement with the FSA to reassure customers, minimise market confusion, maintain confidence in MPPI and ensure that people who have MPPI can maintain their cover, especially in these times of continuing economic uncertainty.

Under the agreed framework, mortgage lenders and insurers will work together to review the terms and conditions of all their MPPI policies and associated sales and marketing materials to ensure that any potential future changes will fall in line with the agreement. Firms will contact all affected customers individually to let them know what the changes are and how their policy will work in the future.

Firms will also review any premium increases and other changes that resulted in cover being cancelled or reduced since 1 January 2009.  Any of these changes that are found not to be in line with the agreement will be reversed.

The agreement specifies that all reviews and any actions relating to past, current and future policies, including any premium refunds that might be due, should all be completed by the end of June 2010.

Customers do not need to take any action at all at this stage.  If their policy is affected in any way, their mortgage lender or insurer will contact them individually.

Speaking on behalf of all four trade associations and their members, the ABI’s Director General, Stephen Haddrill, said:

“MPPI is an important product and is playing a key part in helping to keep people in their homes during the recession. It can offer a lifeline to people who may otherwise have faced losing their home. These policies provide extremely valuable cover for customers and this agreement is all about ensuring that they continue to do so. As with all insurance, premiums need to reflect the risk but any changes not only need to be fair which we believe they are, but also to be seen to be fair.  

“Lenders and insurers will work together on a thorough review of their policy terms and conditions, marketing material and any changes made, such as a premium increase, since the start of 2009 and make any refunds in line with the agreement.  

“MPPI customers do not need to take any action, although it is important that they continue to pay their premiums to ensure that their cover continues. Their mortgage lender or insurer will contact them if their policy is affected in any way.”

The new system will apply to personal injury claims valued between £1,000 to £10,000 in l damages – around 80% of all motor personal injury claims. As well as speeding up claims, the new process will reduce unnecessary legal costs through setting a fixed legal cost for each stage of the process. It will involve the use of standardised electronic claim forms to enable key decisions to be made more quickly and reduce duplication. Challenging new timelines have been built into the process to ensure much quicker compensation payments.

Nick Starling, the ABI’s Director of General Insurance and Health, said:

“The ABI has long argued for a simpler, more streamlined compensation system that works in the interests of consumers, so we completely support today’s announcement. This new process will cut down on delays, and reduce the high legal costs that are paid for through motor insurance premiums.

“It is now vital that employees injured at work have the same opportunity as those injured on our roads to benefit from this new process, so we call on the Government to extend it to cover employers’ liability insurance claims.”

• ‘Fronting’ – where parents add their son or daughter to their motor insurance policy as an occasional named driver, when in fact they are the main driver.
• Not disclosing motoring convictions, ranging from a speeding conviction to drink driving. In one case, a policyholder whose vehicle was stolen had his claim for £7,000 rejected, as it was discovered that he had failed to disclose two convictions for driving without insurance.
• ‘Forgetting’ about previous claims, such as motor accidents and burglaries.
• Under-estimating alcohol and tobacco consumption when applying for life and health insurance.

Nick Starling, the ABI’s Director of General Insurance and Health, said, “Honesty is the only policy. Cheating to get cheaper insurance puts your cover in jeopardy, with potentially disastrous consequences. Being truthful and shopping around will mean that your insurance delivers when you need it, and that you get the best possible deal.”  

Simon McBride