MOTOR INSURANCE PREMIUMS (Hansard, 18 May 1973)

§ Mr. Ray Carter (Birmingham, Northfield)

By way of introduction to this debate I should explain precisely why it is taking place. Under the Counter-Inflation Bill, in addition to the regulatory powers which the Secretary of State for Trade and Industry has regarding insurance companies and businesses in general, powers were devolved upon him to control premium levels and prices, charges and so on.

When, four or five weeks ago, the major motor insurance companies announced their intention to increase their charges, by figures ranging from 10 per 1958 cent to 20 per cent., I put down a series of Questions to the Secretary of State for Trade and Industry. I asked him whether he would publish in the OFFICIAL REPORT the nature of the applications, their size, the hoped-for increase in premium levels and the names of the companies.

Unfortunately, the Minister chose not to give me any of the information which was requested. I should remind the Minister at the earliest possible moment that I served on the Committee on the Counter-Inflation Bill and that the Members who sat on that Committee were assured at every stage by the Treasury Ministers that when the House wanted information on any subject relating to the Counter-Inflation Bill and its measures, direct access would be made available.

At the first time of asking that was seen to be an extremely vain promise because no information was given. So much for the Government's boast at the outset of their term of office that they would be an open and honest Government. The very least which I expect from the Minister is that he will give the information about these applications, including the size of the applications and the companies which have requested permission.

The motor insurance companies have requested once again to raise their premiums. It is a matter of once again. For the benefit of the House, and to put the debate into perspective, I shall indicate the way in which motor insurance premiums have moved over the last two years. The premium to which I refer is the gross premium level for an average family car. In July 1970 that premium cost £33.96. By October 1970 it had increased to £36.38. By January 1971 it had increased to £39.96. In April 1971 it increased to £45.61. In July 1971 it was £46.75. In October 1971 it was £49.71 At the beginning of 1972 it had risen to £52.41. By April it moved ahead to £55.55. By July 1972 it was £5714 and at the end of 1972, in October, it was £62.62.

The period which I have taken happens to coincide approximately with the expired period of office of this Government. I think that there is some relationship between the movement of those figures and that period of office, though 1959 I have no doubt that the Minister will refute that today.

The figures are alarming. They show that in a period of about two years and three months motor insurance premiums have doubled. They have gone up by 100 per cent. By any standards that is an astronomical rate of increase.

Inflation cannot be held to be the sole cause of that rate of increase. I have no doubt that the insurance companies will say that that is the reason, that repair charges have gone ahead, that wages have gone ahead in a similar fashion, and that their own internal costs have increased dramatically in two years and three months. But it would be stretching the imagination of every Member and, I hope, even of the Minister himself to believe that a doubling of premium charges in two years and three months is directly attributable to inflation.

The Minister may say that he is unaware of these figures. If he is, it is a sad state of affairs, because he should have them available to him. He may say that the figures are suspect. Let me disabuse him immediately. The figures were obtained from the British Insurance Association which apparently has no wish to hide them and is quite happy to have them generally known.

Even that 100 per cent. increase in gross premium levels over the past two years and three months is not the whole story. On the contrary. Because of various pressures on the insurance companies they have been devising various means in their motor insurance policies of getting through hidden increases in premium costs.

To illustrate my point, let me quote from a letter written by a Mr. Donald Anders-Richards in the business columns of The Times of 5th April: I have just protested because the renewal notice which I received a few days ago details a 16 per cent. increase on last year's premium and a further 'hidden' increase of 10 per cent. due to the original no-claim discount system being restructured—making an effective increase of 26 per cent. in all. Quite apart from the fact that hidden increases of that kind deliberately undermine the law as it is enshrined in the Counter-Inflation Act, it is quite dishonest of motor insurance companies to 1960 hide these increases in this way. If they want to restructure their policies, they should be open with their policy holders, tell them what is going on, and not behave in the way that they are at present.

In addition to the hidden costs which are reflected in the net premium that a person has to pay—that is, net of all no-claims bonuses—and the 100 per cent. increase reflected in the level of gross premiums, we are now told by the motor insurance companies that they want another increase of between 10 and 20 per cent. Given that record over the past two years and three months and given the fact that the country is in the grip of a prices and wages policy, the Minister must act to protect the interests of the motoring public. The Minister cannot allow the companies to take the easy way out this time. When they have found themselves in difficulties over the past two years or so they have taken a very easy way out by increasing premiums and passing the extra cost straight on to the motoring public.

Having studied the affairs of the motor insurance industry, I believe that the companies can, within their own organisations, make massive savings of a kind that could stabilise motor insurance premiums and, what is more, prevent them from going up even further. There are tremendous opportunities for increased efficiency within the organisations.

The Minister should tell us this afternoon that he has no intention of allowing the increases that are demanded to go ahead unless he can obtain from the insurance companies a clear undertaking that they will stabilise premium charges during the prices and incomes policy and that, in addition, he will announce at the earliest possible moment an inquiry into the affairs of motor insurance companies.

I am sure, when I look at the financial statements of these companies, that they are highly inefficient. Looking at the major companies and seeing that commission and expenses combined account for as much as 40 per cent. of the premium income, we are entitled to ask that they look to themselves for economic improvement and increased efficiency and thus stabilise and possibly reduce premium levels in future.

1961 If the Minister cannot do what I have suggested, I believe that, in view of the past record of these companies and based on conversations that I have had with leaders in the insurance world, we can look forward within two or two and a half years to a premium for the average motorist of not £62.22, but £100 to £120. That is not an idle boast. It is openly being prophesied in the City and by many leaders in the insurance industry.

It is said that our rates are cheaper than on the continent and in other parts of the industrialised world. There is a good reason for that. The British motorist is extremely careful. He does not have the damage levels that the continental motorist has. That is why the premium costs for the British motorist are so low.

I urge the Minister to reassure the motoring public that this astronomical rate of increase in premium levels will not be allowed to continue, particularly while we are in the grip of a prices and incomes policy.

§ The Under-Secretary of State for Trade and Industry (Mr. Anthony Grant)

I am grateful to the hon. Member for Birmingham, Northfield (Mr. Carter) for raising a subject of very wide general interest. On a personal note, a little time ago he and I had a clash—only of words— and I should like to say how handsomely he cleared up the misunderstanding between us. Therefore, I am certainly motivated by no animosity towards him today.

I repeat, I am grateful to the hon. Gentleman for raising this matter because it gives me an opportunity to say something about insurance premiums, particularly about motor premiums, as this is a matter on which there is some public misunderstanding over the effect of the Government's counter-inflation policy.

It is true that there have been substanlial increases in motor insurance premiums in recent years, but these were before the standstill. As the House knows, there was exceptionally fierce competition in motor insurance a few years ago when insurers cut their rates. Indeed, one might say that the difficulties arose in about the years 1968 and 1969. The only party political point I would make is that this was when the Labour Government were 1962 in office. So the trouble started some time ago.

When that happened, it had for some time been clear that the cutting of rates was much overdone. Several companies specialising in motor insurance failed and the large companies lost a lot of money which had to come out of their reserves. The full extent of the under-pricing at that time is only now becoming clear as the accounts of motor insurers reveal the size of the "tail" of claims from the business underwritten at that time. Clearly, premiums had to go up to avoid further losses, and failures and inflation increased the size of the rise.

In the last three years, therefore, insurers have increased their rates. The annual reports of companies for 1972 now being published show that some at least claim to have succeeded in eliminating underwriting losses or to have made a small profit. Others report continuing difficulties. Nevertheless, rates in the United Kingdom are considerably lower than those in the EEC or North America.

The introduction of the standstill on 6th November 1972 prevented further increases in premiums. Some companies had already announced that they would be introducing higher rates—for example, from 1st January 1973—but were prevented from doing so and still have not made those increases. During the standstill we applied the very strict criterion that premium increases could be approved only if claims experience was so adverse that the losses could not be absorbed. Because of this the standstill was virtually complete. This means that with very minor exceptions the scheduled rates for insurance premiums, including motor insurance, are no higher today than they were on 6th November last.

I am well aware that many motorists think otherwise. This is because motor policies are normally renewed annually and offers to renew sent out by insurers since the beginning of the standstill have been for larger amounts than the year before. These increases, however, reflect higher rates introduced before the standstill. We have followed up several hundred complaints from motorists and found this invariably to be the case. We also found a handful of clerical errors which the insurers promptly corrected. So far as insurance is concerned, the standstill really has been a price freeze.

1963 We are now into stage 2 and I should like to explain to the House how we are dealing with insurance premiums in this stage of the counter-inflation programme. Section 9 of the Counter-Inflation Act 1973 gave the Secretary of State power to restrict insurance premiums. This was done so that price control could be applied to insurance consistently with cur responsibilities under the Insurance Companies Acts for the protection of insured persons through the supervision of the solvency of insurance companies.

That is to say, we have to achieve a balance between the need to restrict premiums under the counter-inflation programme, the success of which is of major importance to everyone, and the need to ensure that when in due course a policy-holder makes a claim the insurer will have the resources to meet it. This special solvency consideration apart, which I know is of particular concern to the hon. Member, it is not our intention to treat insurance either more favourably or less favourably than the rest of industry.

The control of premiums in stage 2 applies to the scheduled rates for those classes of insurance business that enter into the cost of living or affect industrial or commercial costs. In principle this covers a wide field, but in practice some of the premiums concerned are changed infrequently and we are likely to be dealing mainly, if not almost entirely, with motor insurance.

We must expect to see some increases in motor premiums in stage 2. Those insurers who had increases held up by the standstill will want to go ahead; others will wish to take account of cost increases which are allowable under the code, including extra cost of repairs to privately-owned motor cars arising from the introduction of VAT in place of purchase tax and SET.

Insurance companies and Lloyd's syndicates responsible for more than 90 per cent. of business to which control applies have agreed to give notice of proposed increases in scheduled rates. This is a much higher degree of pre-notification than applies for price control generally, and I should like to acknowledge this valuable co-operation on the part of the industry. It means, however, that for insurance we shall be deciding applications from firms of a size that in 1964 other industries would not need to seek advance approval for increases. In our special relationship with the insurance industry, however, we welcome this even though it adds substantially to our labours.

The main item of cost in insurance is the payment of claims. In a sense this is the "raw material" of insurance, but whereas the manufacturer buys his materials at the beginning of his operations the insurer learns the full cost of claims as the last stage in his. This makes the calculation of rates of premium peculiarly difficult as it is necessary to charge the amounts required to meet future claims. As I have already mentioned, some insurers have been seriously over-optimistic about this in the past.

In stage 2 we are trying to assess what premiums are currently necessary to meet claims arising from now on. Moreover, we are concerned under the code only with increases in allowable costs since 30th September 1972. Also, as has been reported in the Press, we are taking into account the investment income derived from the premiums for the business in question. That is to say, we are applying very stiff tests indeed to requests for premium increases, and there is no question of allowing otherwise prosperous companies to raise their premiums to recover past losses. We take the view that they were incurred when the insurers were free to determine their charges and, therefore, fall to be borne by the companies themselves. Where a company does not have a cushion of other business or sufficient reserves to absorb motor losses, we must take this into account in the general interest of the policy-holders concerned.

I assure the hon. Gentleman that there is no intention in any way to conceal information. I can tell him that in stage 2 there have been 18 to 20 applications from motor insurers and we have been able to give decisions in about one-third of the cases. I hope that we shall be able to decide further cases shortly. Insurance companies are in a different position from other industries and it is for the companies concerned to make appropriate announcements. Again, the circumstances relating to insurance premiums are very different from those relating to prices in other industries.

1965 It is for the companies concerned to inform their policy-holders of the new rates when they have been approved. Different companies may require varying periods in which to programme their computers or otherwise give effect to the changes. Where the major insurers with large profits from other business are concerned, we are asking them to consider whether, in the interests of the general success of the counter-inflation programme—which is important to them as it is to the country generally—they are prepared to seek or accept less than their entitlement under the code. The large profits I have mentioned are for the most part derived from overseas business and are a most valuable part of our invisible exports and a great credit to the insurance industry. I am glad to say that some of the applications received and the decisions accepted show a willingness on the part of these leading companies to make this contribution to the programme.

There is, however, a limit to how far the big companies should be asked to go in carrying losses. If premium rates are too much held down in this way, this could increase the competitive pressures on other insurers whose resources are smaller and make it more difficult for them to obtain the level of income they require to meet their future claims. This is a matter which we are watching very closely.

I should now like to turn to the question of insurers' costs, and particularly the cost of repairs to motor cars raised by the hon. Gentleman. There are two kinds of costs in motor insurance, namely, the insurer's expenses and the settlement of claims. The proportion of these two varies between insurers according to the circumstances of their business.

The hon. Gentleman has criticised the level of expenses. It is not for me but for each company to defend the level of its expenses. If insurance is to be safely, efficiently and competitively operated in this country, there is a risk in cutting administrative expenses. If the hon. Gentleman looks at any other service industry—quite apart from manufacturing industry, which is in a different category —he will find that a 30 per cent. level of administrative expenses is probably remarkably low.

1966 Then there is the very important matter of the verification of claims and the inspection of work done to monitor the cost of claims. This, too, is expensive, particularly where engineers or other highly qualified staff have to be employed. It is, however, expenditure that may reduce total costs and I do not think that anyone suggests that the insurers should spend less than they do in this way; if anything, rather the reverse. It seems to me, therefore, that it would be rash to draw conclusions about the efficiency of motor insurance simply on the basis of an expense ratio of 30 per cent. of whatever it is.

There are also two main elements in the settlement of claims, namely, compensation for personal injury and the repair or replacement of motor vehicles. I am sure that hon. Members will be well aware that the courts are awarding increasing sums in compensation for personal injury for a variety of reasons. As wages and salaries and the general level of prosperity increase, this is clearly right. Premiums have to provide for these higher personal injury settlements, and I do not think that anyone disputes that.

What is contentious is the cost of repairs. All of us have heard of the garage that quotes one price for an insurance job and a lower one to the motorist himself. It would be foolish to deny that this may happen, but the insurers would question whether the different prices are for the same quality of job or whether the absence of a check by their engineers may make the difference. I do not wish to pursue this as I am sure that everyone has his own car repair story—I certainly have—and is quite sure that he knows the answer.

There is clearly a real and long-term problem here and it is necessary for all concerned—not only the insurers but also the motor repair trade—to tackle it energetically. The British Insurance Association and Lloyd's gave a lead when about three years ago they set up the Motor Insurance Research Centre at Thatcham to devise improved and less expensive methods of repair and to make these known to the trade. Also, the insurers were among the original sponsors of the proposed Garage Quality Council, now renamed Council for Vehicle Servicing and Repair, which is intended 1967 to concern itself with standards of repair. The Government attach importance to this work and to the council getting into business as soon as possible. I look to the insurance industry to take a leading part in this area.

To sum up, therefore, stage I was an absolute price freeze on insurance. In stage 2 we are applying the criteria set out in the White Paper and, in particular, applying the very tough rules of the code to the prosperous companies which, nevertheless, are being asked to accept less than even these rules will allow. At the 1968 same time, we are exercising close supervision over insurance companies in the interests of policy-holders.

Although I am grateful to the hon. Gentleman for raising this subject today, because it is of great importance, he very much underestimated in his speech what has been done, what is being done and what will be done under our counter-inflation policy.