Q&A: Why car insurance keeps rising and what can be done

Motorists are facing an insurance premium hike of about 25 per cent in 2016

Cars at a premium: driven by fraud and the end of a price war, the cost of insurance is set to jump next year. Photograph: David Sleator

Cars at a premium: driven by fraud and the end of a price war, the cost of insurance is set to jump next year. Photograph: David Sleator

 

I have a blemish-free driving record but my premium went up by 20 per cent last year. What’s going on?

Some very bad things. Up until the beginning of 2014, Irish motorists were the beneficiaries of a price war between all the leading providers. Increased competition over the previous decade meant prices tumbled as old stalwarts such as Royal Sun Alliance and upstarts like Setanta fought hard for market share.

What’s the problem with a price war? Ultimately, car insurance is a numbers game and last year it emerged that the numbers didn’t add up for many companies which were taking in less than they were paying out. In effect they were putting their very futures at risk. Setanta did more than risk its future. It went out of business. So the price war ended? Exactly. Which is why premiums started to climb. But there is more to it than simple financial mismanagement.

How much more?

Well, fraud for starters. Insurance fraud is estimated to add €50 to the cost of every motor policy in Ireland. And fraud comes in a whole lot of forms. Some acts involve pure criminality like deliberately staged accidents or driving with a doctored insurance disc. Some involve motorists chancing their arm by driving for a couple of weeks after their insurance has expired. Sinister or otherwise, they can all cost us money.

So fraudsters are to blame?

Yes, but they are not alone. The courts, the legal profession and the insurance industry are not helping. Nor is the Government.

What’s going on in the courts?

Who knows – it certainly seems like a free-for-all on occasion, and court awards seem entirely unpredictable.

One case of whiplash can get a claimant 25 grand while the next one might get 15. This encourages some motorists – and their legal representatives – to spin the legal wheel rather than settle cases quickly. And the fact that settlements vary wildly forces insurers to up their reserves which, in turn, pushes up costs. Because they don’t pay for that, we do.

Wasn’t the Injuries Board supposed to fix this problem? Yes but it only assesses 20 per cent of claims.

A further 10 per cent end up in court where 60 per cent of the value of compensation goes to pay legal costs. A remarkable 70 per cent of cases are settled directly by insurers in a way that is utterly opaque. This is because insurers don’t share data other than what they are obliged to give the Central Bank.

That doesn’t sound very transparent. Are there any other transparency issues? There are indeed. Unlike Britain – and Northern Ireland – the Republic does not have an integrated information database. In the UK, insurers share information on motor insurance applicants so fraudulent patterns of behaviour are found faster. Companies there can check no-claims details instantly – this removes the need for motorists to get letters proving that they have a no-claims discount when they are switching providers.

Why is all the information which could drive down costs not brought together?

Because insurance companies don’t really have an incentive to do it. They might wring their hands about higher prices but they know we have no choice but to pay. Car insurance is a legal obligation so you can’t just not take it out if prices get too high – unlike health insurance.

Anything else?

Yes, there are issues surrounding the “discount rate”.

What’s that?

It is the assumed rate of investment return resulting from a big payout. If someone faces a lifetime of challenges following a crash, then money is put aside.

Until recently, the courts assumed that lump sum would grow at a rate of 3 per cent per year.

That was known as the discount rate but, in 2014, a judgment in the Gill Russell case set the rate of growth at 1 per cent because of sluggish markets. But if the rate of return is lower, then the payout might have to be higher, and the industry will charge policy holders more as a result because they are unsure which rate will apply in the future.

What can be done about this?

Well, the Minister for Justice could end uncertainty by setting the discount rate. Does the Garda have a role in prices climbing?

It has a role in making our roads safer which, ultimately, would stop prices climbing but the force’s hands have been tied due to a lack of resources. Since 2009, the level of resources provided to the Garda has fallen dramatically. In 2009 there were 1,200 gardaí in the Traffic Corps. By 2013, the number was just 800.

The force’s job is not made easier by a reliance on a very old system – windscreen discs. Such a system is absurd and has been scrapped in the UK. Since October 2014, camera-based technology has been used there and there has been a 42 per cent increase in fraud detections. Were discs replaced with automatic number plate recognition (ANPR) technology, a system of cameras – car-mounted, fixed, mobile or handheld – could read car registration numbers and check them against a database in real time. Then fraud would drop dramatically here too.

What does all this mean?

Motorists will most likely be hit with premium hikes of about 25 per cent next year. This will involve most motorists in Ireland paying about €300 per year more for a comprehensive policy in 2016 than they did in 2014.