The Report on the Cost of Motor Insurance ("the Report") was published on 10 January 2017 and aims to investigate the main problems embedded in the motor insurance industry which are resulting in a rise in premiums for motorists. Insurance companies have welcomed the Report which was published in response to the 51 percent rise in motor insurance costs since 2011. The extensive Report drafted by the Cost of Insurance Working Group ("the Working Group") incorporates some of the key recommendations which were presented in the Joint Committee on Finance's report, the "Report on the Rising Costs of Motor Insurance", published in November 2016.
The Report focuses on six main categories which require a complete overhaul to tackle the increasing costs faced by insurance companies and in turn their customers. In total the Working Group has set out 33 core proposals in a bid to provide stability within the motor insurance market and provide fairer premiums for its consumers. The Working Group has stated that they will provide quarterly reports which will be published on the Department of Finance's website to monitor the progress in the implementation of the Action Plan.
Factors resulting in the fluctuation of premiums
The Report identifies the main factors which have exposed the domestic insurance sector to a greater risk of claim pay outs and have subsequently resulted in the increase of premiums. The following issues have been opined as being the key causes of the increases in premiums:
- Mandatory Third Party Cover- Under the EU Motor Insurance Directive 2009/103/EC it is mandatory to have third party insurance which has caused motor costs to soar. This EU Directive has been transposed into Irish law under Part VI of the Road Traffic Act 1961.
- Under-Pricing- between 2010 and 2014 private motor insurance companies were under pricing and failing to take into consideration any potential future losses. Under-pricing combined with the low interest rate environment has resulted in a spike in premiums in the last 18 months.
- Increased claims inflation- the Working Group has concluded from its data that the average Personal Injury compensation award increased by 5 percent between 2013 and 2015.
- Reserving- the Central Bank Insurance Statistics has demonstrated that premiums have increased as a result of setting aside larger reserves for claims. Claims incurred have increased by 19 percent since 2014 to €1,293,000.
- Court Jurisdictional Changes- insurers have opined that increases in jurisdiction have resulted in an inflation of awards.
- High Awards for Soft Tissue Injuries- insurance companies have argued that an inconsistent use of the Book of Quantum has provided for an increase in awards in comparison to other jurisdictions.
- Civil Liability (Amendment) Bill 2017- this legislation provides for Periodic Payment Orders which have lead to uncertainty around the likely future costs of catastrophic claims.
- Legal Challenges in relation to Setanta Insurance- there is an ongoing uncertainty in relation to the payment of Setanta claims.
- Discount Rate - Since the decision in Gill Russell -v- HSE there was a reduction in the discount rate from 3 percent to 1 percent causing an increase in premiums.
Key categories explored in the report
The overall aim of the Report is to provide clarity certainty and transparency within the industry through the incorporation of the 33 recommendations together with the 71 associated actions. The following categories have been identified as key areas in which the Government, Insurance Ireland and the Central Bank can act to curb the volatility in the market.
1. Protecting the Consumer
Transparency in Pricing Premiums: The main issue which has been identified in this section of the report is the lack of transparency in relation to how motor insurance policies are priced. A particular issue which has been raised is that no explanation has been provided by insurers for the reason that a premium has increased. The Working Group has recommended that a premium breakdown should be provided at the quotation stage and also at the renewal notice stage. The percentage and monetary value of the no claims discount should also be disclosed at renewal stage. This would encourage competition within the market and allow for consumers to shop for the most competitive policy. Competition will also be enhanced by the provision of 20 days as opposed to 15 days to consider a renewal notification.
Policy Quotations for Emigrants: Another key problem which was evidenced in the Report was the difficulty returning emigrants faced in obtaining a reasonable policy quotation. The main dilemma faced by drivers is that insurance companies are reluctant to take driving experience in other countries into consideration for the obvious reason that it is difficult to verify this information. This has resulted in the denial of the benefit of a no claims bonus. The Working Group has suggested that prior driving experience in Ireland and abroad should be taken into consideration, particularly in countries where vehicles drive on the left hand side.
Transparency in Settling Claims: Lastly, in this section, the Working Group has recommended a greater level of transparency in relation to discussing the settlement of claims by insurance companies with policyholders. This is important as often policy holders settle claims without informing the insured and they only discover the claim on the renewal of the policy.
2. Improving Data Availability
Data Collection: The Working Group through its consultation with stakeholders recommended the establishment and maintenance of a database which would monitor claims costs. This database would work in tandem with the recommendation to provide greater transparency to consumers. Claims information will be published by the Department of Finance in the short term, and on a quarterly basis, outlining a range of key aggregated claims related metrics. This information would be collated by gathering information from insurance undertakings. Three main data gaps were identified by the Working Group which included: 1) emerging risks within the market such as claim costs and trends 2) claim information similar to that collected at three yearly intervals to inform the Book of Quantum and 3) claim or policyholder level information that could be used to combat fraud. The overall objective is to provide accurate information to price premiums as opposed to the current calculation which is based on the likelihood and costs of claims into the future. A sub-group will be established to assess the appropriateness of a register which would gather information on a claim by claim basis.
National Claims Information Database: A National Claims Information Database would subsequently be established in the medium term to facilitate a more in-depth annual claims' trends analysis with data being published in the form of an annual report. The annual analysis would need to be delivered in a way that mitigated the risk of insurance undertakings directly using the report to derive prices. In order to assess what metrics would be utilised, the Working Group has stated that a sub-group will be set up by the Department of Finance in January 2017 comprising of representatives from the Central Bank, CSO, Society of Actuaries in Ireland and other such bodies. This would be in line with the UK approach, where the Institute and Faculty of Actuaries has undertaken a market wide analysis since 2010. The Society of Actuaries in Ireland has discussed a number of metrics which could be utilised as follows: 1) average gross earned premium 2) earned ultimate "burning cost" per policy 3) The investment return received by each insurance undertaking for personal lines motor insurance on an average per -policy basis and 4) The expenses of each insurance undertaking, split by commissions (e.g. brokerage costs) and non-commissions (e.g. employee costs, light & heat, rent, etc.) on an average per-policy basis.
3. Improving the Personal Injuries Claims Environment
Personal Injuries Commission: The key recommendation arising from this part of the report is the establishment of a Personal Injuries Commission ("PIC") to investigate the factors which are contributing to the upward trend of Personal Injuries ("PI") awards. The commission will consist of members of the medical profession, legal profession, representatives from the insurance sector and members of Government. Research has evidenced that the cost and frequency of claims have increased in recent years which has had a direct impact on motor premiums. Information will be gathered from the three settlement channels in Ireland, those being the Courts, Personal Injuries Assessment Board ("PIAB") and direct settlements. It is estimated that PI claims make up 1% of claims on motor insurance policies annually however the costs of PI claims account for approximately three quarters of the overall costs of claims. The Working Group assesses that delivery costs such as solicitor's fees and costs of medical/engineering reports account for 40 percent of compensation costs outside of PIAB. PIAB was introduced in 2004 and uses the Book of Quantum which sets out the prevailing level of damages for injuries in Ireland to assess damages. A significant number of cases are settled through PIAB however there is no publicly available data evidencing the outcome of these cases which causes difficulties in assessing the claims environment in full. Claim details in relation to direct settlements between insurers and claimants are also outside public scope. Court data is also limited in that it does not set out delivery costs which are necessary expenses in compensation payments for insurance companies. Data from Insurance Ireland between 2013 and 2015 suggests a rise of 5 percent in the average claimant award.
Models for assessing damages in other jurisdictions: The Working Group has recommended that systems for handling PI claims in other jurisdictions should be examined by the PIC to determine whether our current system of assessing damages should be augmented. Some commentators have suggested that whiplash injuries account for approximately 80 percent of PI claims in Ireland. In turn it has been opined that less severe injuries have attracted higher levels of damages than the UK. In addition, the PIC will be tasked with assessing the potential for a national medical panel of trained and accredited medical specialists for completion of reports with a timely medical assessment of the extent and impact of the injury. The establishment of a panel of medical experts for court should also be discussed.
A second report will be published in 2018 which should report on international compensation levels, compensation systems and assess the benefits of a "care not cash" model. The Working Group also examined other jurisdictions in relation to a scale of grading injuries. A grading scale would be beneficial particularly in terms of soft tissue injuries which can be difficult to diagnose. For example, in Sweden a classification system was introduced in 1995 known as the Whiplash Associated Disorder and classifies injuries from grades 1-3.
4. Reducing the Costs in the Claim Process
PIAB: One of the main aspects of this part of the Report focuses on the importance of the maximisation of the PIAB process. The action plan in this regard is to review cases of non-attendance at medicals and refusal to provide details of special damages which are pivotal factors to enable PIAB to provide an accurate assessment. According to statistics set out in the Report delivery costs equated to 44.2 percent in 2015 for cases assessed outside PIAB compared to the stable rate of 6.5 percent for cases settled in PIAB. The cost of expert medical/ engineering reports increased by 34 percent between 2013 and 2015. Overall the data suggests that if cases can be settled at an earlier date then ancillary costs can be reduced.
Legal Services Regulation Act 2015: The introduction of the Legal Services Regulation Act 2015 makes extensive provision for a new regime of legal costs. It imposes obligations on legal practitioners to set out a more detailed estimate of costs in the form of a Notice. It will no longer be permissible for solicitors to set their fee at a specified percentage of damages awarded to clients. The Office of Legal Costs Adjudicators will replace the Taxing Master's Office and adjudication can be sought from this office if a client is of the opinion that costs are excessive.
Other aggravating factors: Four other issues which have impacted on the costs of claims are discussed below:
- The failure of Setanta Insurance and the ongoing litigation in respect of compensation arrangements for claimants has caused uncertainty in the market. Legal proceedings were appealed to the Supreme Court in October 2016 and judgment is reserved. The MIBI are challenging the Court of Appeal decision which held that MIBI were responsible to cover Setanta's claims In January 2016 a Joint Working Group was established to review the compensation framework in Ireland. They recommended that the Insurance Act 1964 be amended so that MIBI would not be liable on the insolvency of insurance undertakings.
- Jurisdictional changes arose as a result of the Courts and Civil Law (Miscellaneous Provisions) Act 2013 and some stakeholders have suggested that this will inflate claim costs. The intention of the increase in jurisdictional limits was that cases ordinarily dealt with in the High Court could be dealt with in the Circuit Court which would result in reduced costs. The District Court now has a limit of €15,000 increased from €6,384. Although data collected from the Working Group has not shown an inflation in claims costs it will be monitored as cases progress through the courts using the new regime.
- In the case of Gill Russell v HSE the discount rate was reduced from 3 percent to 1 percent for future care costs and at 1.5 percent for other future pecuniary loss.
- In 2010, the President of the High Court established a Working Group on Medical Negligence and Periodic Payments to examine whether provision could be made for periodic payments in PI cases. The Working Group recommended that periodic payments should be ordered in the case of catastrophic injuries where long term permanent care into the future is required.
5. Reducing Insurance Fraud and Uninsured Driving
Insurance Fraud Database: The insurance industry estimates that it has spent between €14 and €17 million in each of the years since 2011 in tackling insurance fraud. Insurance fraud is estimated by the insurance industry to cost €200 million a year which they claim adds approximately €50 to each policy. The Working Group has proposed the introduction of an insurance fraud database which would allow undertakings to monitor fraud during the course of a policy cycle. Insurers would be able to securely share data between them to protect honest customers. The Working Group estimates that 50 percent of insurance fraud involves motor incidents. Insurance Link was introduced by Insurance Ireland in 1987 however stakeholders have suggested that the information contained in the database could be dramatically improved. It is constrained due to the restrictions placed on the disclosure of documentation. Criminal justice legislation may be required in introducing the new database to safeguard data sharing between the undertakings and also to protect the freedom of individuals. Measures will also be undertaken to improve co-operation between the industry and the Garda Síochána and a specific team within the Garda Síochána may be established to tackle insurance fraud. The aim is to have the database in place by the end of 2018.
Section 30 of Civil Liability and Courts Act 2004: The Working Group has called for a review of Section 30 of the Civil Liability and Courts Act 2004 which provides that a register of personal injuries actions is to be maintained by the courts service. Section 30 has not yet come into effect due to the limited resources of the Courts Service. The information collected under section 30 is limited and the Working Group suggests that it would be beneficial to collect the PPSN number of claimants. A review will be carried out on Section 30 by the Department of Justice and Equality.
Uninsured Drivers Database: Compensation for collisions where an insured driver is at fault is paid by MIBI and costs the bureau approximately €50 to €60 million annually. The insurance industry estimates that this equates to €30 approximately per premium sold. Insurance Ireland and MIBI have suggested the establishment of a database which would collect information on insured and uninsured drivers. This will require significant co-operation from insurance undertakings to collect information from drivers such as their driving licence number. This will be helpful in the underwriting process as they can check on the Department of Transport, Tourism and Sport's National Vehicle and Driver File to check whether the driver is licensed, has any disqualifications or penalty points. An additional clause will also need to be inserted into insurance policies for fleet vehicles to ensure that when a vehicle is replaced it is updated by the fleet manager on the National Fleet Database. An important aim is to provide An Garda Síochána with a mobile app for roadside access to the central database.
6. Promoting Road Safety and Reducing Collisions PI actions in respect of motor accidents cost the industry approximately €422 million in 2015. The number of collisions has increased in recent years which has led to costs rising on an annual basis. The Working Group, Road Safety Authority and stakeholders met to discuss a number of recommendations which would reduce the number of road collisions:
- To ensure that a driver holds a valid NCT which will be available for inspection on the new database for uninsured and insured drivers. An issue identified with this proposal is that if a car fails an NCT then the driver may opt to drive uninsured and this will have to be considered further.
- That insurance companies could promote the rules of the road by providing information to drivers, particularly learner drivers, in their policy documentation.
- The implementation of Telematics would monitor a person's driving habits such as whether they are habitually speeding or braking harshly and are thereby posing a greater risk on the road. Telematics would aid companies in pricing premiums based on the information gathered from the wireless devices.
Conclusion Overall it is evident that extensive resources will be required to implement the above recommendations. Once the databases are established it will be extremely beneficially in identifying fraud, uninsured drivers and also trends in claim costs.