The increase in Insurance Premium Tax, introduction of capital reserve requirements, rising car technology, and savvier insurance shoppers are the real reasons for the rise in motor insurance costs, according to Lee Jones, the managing director of Free Motor Legal.
Jones says that insurers’ focus on whiplash fraud – which they say has driven up premiums – is a disingenuous tactic which does not provide the full picture of how motor insurance costs are calculated.
He said that last November’s increase in Insurance Premium Tax (IPT), from 6% to 9.5%, was a major factor in rising costs for policyholders across motor and household contracts.
“A further hike to 10% is to coming into effect on 1st October 2016,” said Jones. “So premiums can be expected to rise slightly more due to the actions of the Treasury.”
“The hike in IPT, which affects not only motor insurance […] is expected to net the Treasury an additional £8.1 Billion by 2021.”
He also cited Solvency II, the requirement introduced in January by the EU for insurance companies to hold more capital reserves, as another burden on insurers’ finances. Jones said that this meant they had less cash to put into investments, so they had to look elsewhere for increased profits.
“Funny how the increase in premiums has arisen at the same time insurers are able to report year on year improved profits,” he said.
A third reason for current motor insurance costs was that cheaper deals for new customers were being wound down. Jones said that shopping around for policy renewals had led to insurers losing out on auto renewals, which in many cases had led to them charging loyal customers more for their insurance.
“The cheaper deals for new customers are starting to dry up as the bargain basement quote new punters get is usually allowing the insurer to at best break even or sometimes they cover the first year at a loss, hoping you will renew and they will make their money out of you in the future.
“Due to people becoming more savvy and shopping around, the insurers are offering new customer deals less and less. Overall this then pushes up the average premium figure.”
The fourth reason for higher premiums was that general higher expense involved in repairing modern vehicles.
Jones said that the argument that clamping down on fraudulent whiplash claims was not supported by current evidence or analysis.
He cited a recent report by Fitch, the ratings agency, which showed that insurers were unlikely to pass on any savings until 2018 if further reforms to the Personal Injury market were passed through.
“Many organisations representing injured people feel the insurers are unlikely to ever pass on the savings and a recent article in the times accuses the insurers of failing to pass on savings from a previous round of reforms in 2013 resulting in substantial savings when lawyers fees were slashed by 60%. Since then, the number of claims being made has also declined,” he added.
“The substance behind the figures the insurance industry seek to rely on just don’t stack up.”