The rise and rise of unaffordable motor insurance

You know things are bad when people start moving back in with their parents because car insurance costs too much. For most of us, moving back in with mammy would be a line of last resort but it is increasingly a reality for many who have seen the cost of insuring their car for a year spike dramatically upwards.

On average, the cost of car insurance has risen by 38 per cent in the past year, and that’s on top of significant rises in 2015 and 2014. Some have seen three- or four-fold increases in the numbers at the bottom of their renewal slip. Ireland Underground, a pressure group whose aim is to lobby for reductions in the cost of insurance, has reported that at least one of its members has a position of work under threat because she cannot afford the sudden increase in premium.

According to the insurance industry, there are solid and sadly sensible reasons for all of this. To begin with, Irish drivers are being wayward and racking up more and larger claims. On top of this, the market for insurance is somewhat perilous: it has been dealing with the collapse of Setanta Insurance and must now deal with the collapse of Enterprise Insurance. And as if these factors weren’t enough, the legal system has been driving up the cost of insurance thanks to inflated fees and the new-found freedom of judges at the District Court level to hand out larger awards.

Maximum awards

What then of the consumer caught in the middle of this mess?

"Insurers have been taking action" Kevin Thompson, chief executive of Insurance Ireland says. "We've seen a lot of restructuring recently, and there have been job losses amongst some of our member companies as there are reductions sought in the cost base. We've also been actively putting more and more focus on fighting fraudulent claims, which is really the one item we have control over. We don't have control over the levels of awards."

It is certainly true that the maximum awards for damages at both district and Circuit Court level have risen, in fact they have more or less doubled since 2013, but the legal profession is adamant it is not the one the blame in all of this.

"Legal costs play practically no role in motor insurance premiums. The real reason for the staggering motor insurance premium increases, involving year-on-year hikes of 20 per cent, 30 per cent or more, is that the insurers engaged in reckless pricing practices over many years", says Ken Murphy, director general of the Law Society of Ireland.

“The insurers slashed premiums, undercharged and under-reserved as a result, drove competitors from the market and now, with far less competition, are massively increasing premiums on the backs of the long-suffering motorists.”

The insurance industry acknowledges at least part of that, admitting that ultra-competitive pricing went too far at the peak of the market, and that the fallout from the collapse of Setanta has not yet been properly addressed. Indeed, it is a struggle between the Law Society and the insurers which is preventing it being addressed.

Assessment board

The legal costs issue was supposed to have been settled years ago by the establishment of the

Personal Injuries Assessment Board

(PIAB). The board is there to assess and process claims more swiftly and more cheaply than a full session of court, and was designed to take the sting out of premiums and claims.

Indeed, the board, in the person of Stephen Watkins, its director of corporate services, says "one of the recommendations was the establishment of the PIAB to remove personal injury cases from unnecessary litigation, reduce the overall costs of delivering personal injury compensation and thereby impact on overall insurance costs.

“There are, however, many cases that settle between parties at varying stages, eg, without a formal claim ever having been made to PIAB, during the PIAB process, etc, where a respondent (usually an insurer) is given a period of time to decide whether they want PIAB to formally assess a case and make an award or not, or in the case of a PIAB award having been rejected by one of the parties – at some stage after this without requiring a court hearing. PIAB reported this year that it had only experienced a small growth in claims volumes in 2015 and that the average compensation award it makes is very stable over the past five years.”

Indeed according to statistics from the board’s annual overview in 2015 “average compensation awards by the board remained very consistent with 2014, increasing by a modest 1 per cent to €22,878 (2014: €22,642) and the breakdown of awards remained steady with motor liability accounting for three-in-four awards (75 per cent), employer liability at 8 per cent and public liability at 17 per cent.

The problem is that the insurers say that PIAB is not the problem. Or more accurately, that the board is being bypassed in favour of the courts because people (and by implication their legal advisers) reckon that they can get their hands on more cash that way.

“Insurance Ireland has said repeatedly that the injuries board has done good work over the last 10 years, in particular, we welcome the swifter settlement of claims, but the claims environment has changed and it needs new powers” says Thompson.

“These include simple things like compelling claimants to provide loss of income information and to attend medicals. This would mean it would handle even more claims and would reduce costly litigation. For instance, according to their annual report, the costs for the injuries board are 6.5 per cent versus 60 per cent in litigated cases”, he adds.

“On legal costs, the OECD have found that Ireland is the eighth most expensive country in which to enforce a contract and just last week the courts service annual report for 2015 was published. It highlighted a 7 per cent increase in the number of personal injury awards in 2015 and an increase in the average award in the Circuit Court of 21.2 per cent in 2015, following a 13.5 per cent increase in 2014. The significance of this is higher court awards impacting on all claims in the system by creating an incentive to pursue a claim to litigation.”

Claims rubbished

The lawyers are rubbishing this claim though.

“There is little, if any, evidence that the level of awards being made to victims of motor accidents can account for the recent, alarming increases in motor insurance premiums” says Murphy.

“The vast majority of claims are handled by the injuries board or are settled directly by insurers. No costs are payable in those circumstances except by the consumer. The tiny proportion where proceedings are issued are subject to ever-decreasing levels of costs by a stringent taxing regime shortly to be strengthened by even more transparent and onerous legal costs requirements under the new Act,” he says.

“The Law Society’s view is reflected in a departmental briefing document for Minister for Transport Paschal Donohoe. It said, ‘It appears motor insurers are now imposing higher premium rates to return to profitability or to boost profitability after a number of years of insurers competing for market share with prices driven down accordingly and possible underwriting losses in some cases.’”

Even on this point, both opinion and evidence is divided. According to Insurance Ireland, the Central Bank says that in 2015 its members results across all businesses led to a total aggregate loss of €284 million.

The Law Society hits back at that point too, saying that "It is worth noting that in his contribution to the Dáil debate on this subject on 20 April 2016, the Minister for Finance, Michael Noonan, referred to a letter he had written to the governor of the Central Bank of Ireland seeking a report on the insurance sector.

“In reply he was told by the Central Bank that until recently insurance firms enjoyed a prolonged period of reasonable investment return on the asset side of their balance sheets. This income stream provided firms with the scope to compete aggressively on price. The Central Bank proceeded to advise the Minister that ‘recent premium increases are designed to restore core underwriting profitability.’”

Improving the situation

Insurance Ireland says that it is working to try and improve the situation for its customers.

“Large increases in motor premiums are not good for motorists or insurers. They lead to insurance becoming unaffordable for many people and higher rates of uninsured driving, which creates major road safety issues,” says Thompson.

“Premiums are a function of the cost of claims that must be met against a backdrop of a highly-volatile claims environment where there are escalating costs and increased pay-outs. Uninsured driving is a symptom of this. We share our customers’ frustration at the increases in motor premiums and recognise the public concern that exists on the issue but we have to get costs under control to bring stability to the market,” he says.

“We need to strengthen the powers of the injuries board to resolve more claims and reduce costly legal fees. We need to further increase the resources given to road traffic enforcement – there’s no substitute for enforcement. We should internationally benchmark awards. Eight out of every 10 motor injury claims in Ireland are for whiplash and awards here are three times UK awards – €5,000 versus €15,000.”

“And we need to fix Setanta. As things stand, insurers are being asked to price a product to factor in the cost of a competitor failing. We can’t think of any other sector where this happens, for example, Dunnes Stores wouldn’t be expected to do this for Tesco so why should insurance companies?”

Political will

All of which is fine, but it requires political will to put into place and the gears of the Oireachtas are grinding very slowly at the moment.

Michael McGrath of Fianna Fáil, who has been lending support to the Ireland Undergound group, says: "We strongly believe that a new task force, along the lines of previously successful Motor Insurance Advisory Board, needs to be established to identify the real reasons why premiums are rising at an unsustainable rate and to make recommendations to deal with the problem."

All the while though, the costs of a legally-required product, provided by a private firms unfettered in their pricing by any regulation or oversight, are rising every day. At what point do we simply declare insurance to be entirely unaffordable?