Motor insurance prices will not change until claims costs fall

A friend was renewing her motor insurance during the week. She is in her 30s with a full licence, a clean record and a driver for 15 years. Her 2016 price was €430. When she rang her insurance company the quote for 2017 was €940. Shop around, I advised, mentioning a few companies who had advertised in the recent past specifically for female motorists.

The next two quotes were €1,020 and €1,250, the latter from AIG which had previously made a big play for female motorists. She finally found a deal for somewhere over €700 – an increase of around 75 per cent. This is the market motorists are now operating in.

The reasons why consumers are overcharged in many areas of this country include a lack of Government action, a failure to tackle vested interests and an incompetent industry.

Cut cost of claims

And here is the thing. Unless something actually changes, prices are not going to fall. Wise heads say that, as things now stand, the prices charged on average may just be enough to cover likely claims costs in future. But there does not appear to be leeway for a sustainable reduction in rates – unless something is done to cut the cost of claims. This is the challenge facing the Government, but one in which the industry also must play its part.

The charge from the Joint Oireachtas committee report on motor insurance this week, that the industry is operating as a cartel, does not stand up to even the most basic of scrutiny. Insurers recorded an underwriting losses of €273 million last year. If this is a cartel, it isn't a very good one.

However the committee was right when it said that the insurance industry has done a bad job for motorists in recent years. So have the usual suspects – the legal industry and the Government. And, as ever, it is the punter who pays.

Part of the problem is that for years we were not paying enough, as insurance companies cut their prices in the drive to try to win market share. Just look at the losses run up by the likes of Zenith Insurance, Setanta and RSA. The friend mentioned above paid €320 one year – and in some cases annual costs went under €300. This was never going to be enough to cover the aggregate cost of claims.

The report from the Oireachtas Joint committee pointed to the lurch into losses from 2012 to 2014. Insurance companies were caught in a double whammy – losses on their core insurance business and a sharp drop in investment income, as interest rates plummeted. The result was higher premiums – an extraordinary 70 per cent increase on average over the past three years.

Now this is an admission that the price slashing was overdone. The industry and its underwriters had got it wrong. Maybe they had hoped profits on their investment would allow them to continue to grab market share and that the circle could be squared by gradually pushing up premiums later. But the crisis quickly exposed the large number of naked emperors in the financial sector, and the insurance industry did not escape,

Identify fraudsters

To diagnose the current financial state of the insurers, it is necessary to look at how they are pricing policies and what the cost of claims on these is going to be in the next five to 10 years. This involves some estimation and speculation. But there is continued pressure on claims costs – as evidenced from court decisions, such as the one discussed above. Premiums will not fall sustainably in the long term unless the cost of claims falls too.

Many of the recommendations in the joint committee report are sensible – and similar points have been made by bodies such as the AA. Minister of State Eoghan Murphy has flagged a similar direction for a working group report he is due to issue, which will outline what the Government plans to do.

There are things that can be done, the reports agree. The gardaí need the technology to catch motorists who do not have insurance, without having to shine a light on insurance disks. The industry needs to complete its information sharing project to help identify fraudsters. Judges can be told to offer less in the cases of whiplash – responsible for over three quarters of claims costs. More cases can be funnelled into the Private Injuries Assessment Board (PIAB) and away from the courts – and a real effort can be made to cut the leeching impact of legal costs.

Let’s hope that the Government can tackle some of this quickly, and the emerging recommendations are going in the right direction – although experience suggests it will back off anything that would upset the lawyers. And it is worrying to hear plans to set up a commission to look at the issue of personal injury awards, reportedly part of the emerging plan. Fair enough if the commission is given a few months to report, but let’s not have another endless talking shop.

You can bash the industry all you want. And it deserves a lot of the flak. You can push it to disclose more information to motorists and about its finances. And this should be done and would improve transparency. But motor insurance costs are not going to fall unless the cost of claims falls, and this requires urgent action on the level of injury awards, fraud, uninsured drivers and legal costs and a wider road safety crackdown.