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Car Insurance (Northern Ireland)

Volume 533: debated on Wednesday 19 October 2011

Motion made, and Question proposed, That this House do now adjourn.—(James Duddridge.)

I am pleased to have secured this debate on an issue that severely impacts on my constituents and others across Northern Ireland. I welcome the fact that the Financial Secretary to the Treasury is here to respond to the debate.

There are considerable problems in the motor insurance market at present, especially in Northern Ireland, where drivers are subject to excessively high insurance costs that are rising rapidly year on year. The problems are not unique to Northern Ireland, but they are particularly striking in our case. We have also found in our research that consumers in Northern Ireland have less choice of insurance providers, with three times fewer companies offering car insurance.

I also welcome the introduction of the Motor Insurance Regulation Bill, promoted by my right hon. Friend the Member for Blackburn (Mr Straw). My right hon. Friend, quite rightly, shone a light on troublesome referral practices and the Bill promises to make much-needed changes to the regulation of the insurance market in England and Wales. Although referrals operate in a different manner in Northern Ireland, the purpose of my speech this evening is to cast light and call for action on many of the issues that plague the operation of the car insurance industry in Northern Ireland. These issues are not entirely commensurate with those raised by my right hon. Friend in relation to England, but must be dealt with in the same direct and purposeful manner. I call on the Minister, where possible, to ensure that that is the case and to use his good influence to press the Northern Ireland Executive to act on the issue.

In August the Consumer Council for Northern Ireland launched a campaign to highlight the cost of car insurance, which I fully support. The Minister will no doubt be aware that the Office of Fair Trading subsequently agreed to undertake an investigation into the car insurance market with a specific focus on Northern Ireland. We must robustly establish why premiums have increased by a reported 40% in the 12 months to March 2011, and why insurance costs are significantly higher in Northern Ireland than in other regions. Indeed, we need not only to assess that, but to redress it. The findings must be robust and the resulting measures must have teeth.

I congratulate the hon. Lady on introducing this debate on an issue that is very important to us all in Northern Ireland. The concern about the insurance premiums is clear, and one reason for those insurance premiums, and the difference in price between Northern Ireland and the UK mainland, is the Compensation Act 2006. Is the hon. Lady aware that in the past year the number of claims notified to the compensation recovery unit in Northern Ireland fell by 23%, whereas in England and Wales it rose by 17%? Is she also aware that last year some 30,000 claims for compensation were made, but that in the past year only 768 were made and their value in the county court is less than £5,000—far below the equivalent figure in England and Wales? Does she feel that, for those reasons alone, insurance premiums in Northern Ireland should be reduced? It is quite obvious that the drivers and vehicle users in Northern Ireland are being disadvantaged financially.

Thank you, Mr Deputy Speaker. I thank the hon. Gentleman for his rather long intervention. I none the less agree with him, and I will come to that point later in my speech.

The extent of the problem is stark. The Consumer Council report, “The Cost of Insurance in Northern Ireland”, published in March 2009, indicated that consumers in Northern Ireland were paying 84% more on average than those in the rest of the UK. Furthermore, five Northern Irish cities ranked among the top 10 most expensive areas in the UK. Relatively expensive car insurance premiums prevail throughout Northern Ireland.

I thank the hon. Lady for giving way, and I appreciate the fact that she has brought this matter to the Floor of the House. Does she agree that the OFT investigation is crucial, because although the Consumer Council report is useful in highlighting particular issues, it is flawed in a number of respects? For example, it compared median rather than best available prices in the UK. It also compared only products available on comparison websites, which is restrictive when we consider the wider available market.

I thank the hon. Lady for her intervention. Like her, I believe that the OFT report is vital in making critical recommendations that I hope will result in the lowering of insurance premiums. I hope that the report has the teeth to deal with this difficult and vexatious issue.

According to evidence, car insurance premiums in Northern Ireland have increased by almost 73% in the past two years. The situation is even worse for younger drivers, whose premiums, according to research, have increased by 112%. Young people face severe difficulties in entering the job market, and the prohibitively high cost of motor insurance is yet another barrier to their finding work.

The average yearly car insurance premium in Northern Ireland is now £923.90, compared with the national average of £525. I am concerned that that, with the increasing cost of fuel, will force some people off the road altogether, or that it will lead to an increase in motorists driving illegally without insurance. I am sure the Minister agrees that we must ensure that that does not happen.

Those problems are compounded by the restricted range of companies offering premiums in Northern Ireland, which limits competition and drives up prices. I urge the Minister to address, and where possible to remove, any barriers to companies that wish to enter the market in Northern Ireland.

Two fundamental arguments are put forward to justify the high costs of motor insurance in Northern Ireland. The first argument is that Northern Ireland is a case apart, because its demographics and road layouts bring an increased risk of incidents on our roads, and the second is that the Northern Ireland legal system places a higher burden on insurers.

To begin with, the evidence that Northern Ireland has a very young population is greatly exaggerated. Indeed, we have a proportion of young people similar to that found in English regions such as London. Likewise, a lack of motorway coverage has been cited as a reason for increased premiums, because statistically those are the safest road type. However, maps show that Northern Ireland has a relatively consistent motorway density compared with regions in the UK and Europe. Moreover, some of the fundamental actuarial evidence regarding the number of accidents, claims and casualties on our highways weighs against any of the debatable factors regarding demographics or road layout.

Those facts must be kept at the forefront of our mind when considering the claimed justification for the increased cost of premiums. They are rising at a time when Northern Ireland is experiencing a decline in the number of road traffic accidents: 2010—the most recent year on record—saw the lowest number of road deaths since records began in 1931. Naturally, every death on our roads is a tragedy, but we must commend the work done to improve safety.

There are some basic facts that are hard to reconcile with rising insurance costs. The number of road traffic accidents reported to the police service has dropped over the past decade from nearly 40,000 per year in 2000 to about 30,000 per year in 2009. The number of compensation claims is decreasing, whereas in England and Wales the numbers are rising. More specifically, according to a National Audit Office report published at the beginning of the year, the number of claims reported to the compensation recovery unit fell by 23% in the decade up to 2009. In short, the trend is clear: although accidents and claims are decreasing, the cost of insurance is increasing. I ask the Minister to give detailed consideration to that fundamental point.

I am grateful to the hon. Lady for giving way a second time. Does she accept that one of the factors cited was the higher compensation paid out in Northern Ireland, which was attributed largely to the fact that juries have been involved in such decisions for much longer than in England and Wales? Critically, however, compensation levels did not increase but insurance premiums did, so it cannot be argued that that was what led to increased premiums.

I thank the hon. Lady for her useful intervention.

All those facts weigh heavily against any argument that the specific demographic or topographical factors in Northern Ireland justify the increasing costs of insurance, and are extremely difficult to relate to the draconian rise in the cost of insurance premiums.

It has also been suggested, by the Association of British Insurers and others, that the legal system in Northern Ireland imposes increased costs on insurers. However, when compared with what happens in England and Wales, many of the factors in Northern Ireland would be expected to act in the opposite direction. My right hon. Friend the Member for Blackburn rightly highlighted the impact of referral fees on insurance premiums in England. It must be noted that a statutory prohibition is in force against solicitors paying referral fees in Northern Ireland. Given that the payment of referral fees to claims management companies has frequently been cited as a significant contributory factor to increasing premiums in England, its absence would be expected to drive down the costs of insurance in Northern Ireland. However, that does not appear to be the case.

I am certainly not claiming that the system in operation is perfect. Indeed, although referral fees are prohibited for solicitors, other agents, such as brokers, credit hire companies and repair garages, may receive them. Although credit hire companies offer a useful service for non-blame drivers, they also raise the cost for insurers, and we must have firm regulations to remove the potential for the exploitation of accidents or those involved in collisions. The claims advice service is an important step in doing that, and should be commended. Another factor cited as a reason for increasing insurance prices in England is the practice of “no win, no fee”. Such a regime does not operate in Northern Ireland. Indeed, the fact that any claimant would have to invest their own money, or else find a solicitor willing to fund the costs, is a powerful disincentive against speculative claimants.

I shall be very quick with this intervention, Mr Deputy Speaker. Does the hon. Lady think that specific consideration needs to be given to social need and the fact that Northern Ireland is clearly, as we all know, a rural community? There are special circumstances in Northern Ireland. Does she think that those should be considered as well?

I take on board what the hon. Member for Strangford (Jim Shannon)—my neighbouring constituency—has said. Like him, I represent a rural constituency and am well aware of issues such as a lack of jobs, inaccessibility, and the economic burden on people. All those can place increasing burdens on people at a time when insurance premiums are increasing.

All that, taken together with the absence of referral fees for solicitors, suggests that Northern Ireland offers a legal system that should act to keep costs down and be at least as effective as the system in England and Wales, if not more so. I would like the Minister to note my concern that that is certainly not reflected in the cost of insurance. I accept that the cost of claims for minor injuries in Northern Ireland can be higher than in England and Wales, partially as a result of there being no recourse to the small claims court for such cases, but opening up the small claims court to such cases is not necessarily the remedy, as that will bring its own risks and problems. However, more needs to be done to ensure that spurious and over-inflated claims do not clog up the system and raise costs for honest motorists. We must increase the burden of medical evidence that is required before establishing cases of whiplash or other, similar injuries, not to penalise the vulnerable—those with genuine, medically verifiable injuries would in no way be affected—but to ensure that the police and medical authorities work together so that claims are paid only in cases involving genuine accidents and genuine injuries.

I have dealt at length with the figures and the legal issues, but behind the wealth of statistics are the everyday problems that the high cost of insurance represents. Those living on low incomes or in rural areas can simply no longer afford to keep a car on the road. Many young motorists and their parents in my constituency have told me of their struggles to secure affordable insurance. They are understandably concerned about the discrepancy in insurance prices between Northern Ireland and other regions in Britain. Through having to pay excessive insurance fees, households in Northern Ireland are being discriminated against. That unfair practice has been in place for too long, adversely affecting those, young and old, who depend on their cars for work, particularly in areas where public transport provision is limited.

The broader context is that the economy is suffering, with record numbers of young people out of work, and that is only exacerbated by restricting people’s use of motor vehicles. We need a dynamic, mobile work force, but making the cost of car insurance so expensive puts up a barrier to our economic success, especially for the young, among whom the unemployment rate is estimated at 18%—almost one in five cannot find a job—compared with an overall unemployment rate in Northern Ireland of 7.6%. Excessive insurance premiums adversely affect young people, preventing them from offering the skill of driving to potential employers. In these extremely challenging economic times, I would ask the Minister to consider any measures that would make insurance more affordable for young people, particularly when driving relates to their employment.

Insurance costs have a real impact on people, young and old, who need to be mobile for social and economic reasons. I hope that I have made clear the scale of the problem faced by our motorists. The insurance industry must stabilise its premiums so that hard-pressed motorists get a fair deal when they purchase their vehicle insurance. I seek assurances from the Minister that he recognises the problem and will act in unison with ministerial colleagues in the Northern Ireland Executive to address the problem in the light of any recommendations from the upcoming Office of Fair Trading report.

Day in, day out, my Northern Ireland colleagues and I face constituents who come to us about the rising cost of car insurance. I heard it again today when I participated in a BBC Northern Ireland debate. There were numerous calls from young people, as well as middle-aged to elderly people, all complaining about the lack of competition and the lack of insurance companies offering different insurance rates. However, the most abiding comments that I heard were about how people wanted insurance costs driven down so that they could drive their cars and access the employment market.

I thank you for your indulgence, Mr Deputy Speaker, and look forward to the Minister’s response.

I congratulate the hon. Member for South Down (Ms Ritchie) on securing the debate. The increased cost of motor insurance has been one of the recurring themes in my postbag since I became a Minister, and those communications have gathered momentum in recent months. The matter affects all parts of the country. It also affects all age groups, but particularly young drivers. At a time when people feel that their cost of living is under pressure, it is important to ensure that the motor insurance market works in such a way as to help consumers and that it tries, whenever possible, to keep the cost of insurance as low as possible.

According to calculations from the Association of British Insurers, motor insurance premiums in 2010 amounted to £10.7 billion, and claims amounted to £10.3 billion. When the other costs of the motor insurance business were taken into account, however, that translated to an underwriting loss of £1.8 billion. The cost of motor insurance to the insurance companies themselves, therefore, is quite significant, and it is loss making. There are clearly some real challenges involved, and we need to think carefully about how we can bring down the costs for insurers, so that that can feed through to the costs for drivers. That is what we are trying to focus on.

The Government firmly believe that businesses and consumers get the best outcomes from financial services if markets are competitive and properly regulated. At the same time, disproportionate or overbearing regulation imposes costs on firms that are passed on to users, either through higher charges and lower returns or through a reduction in choice and competition. Our challenge is to strike the right balance.

It is clear that, on average, motorists faced significant increases in their premiums in the year ending 31 March 2011. That is adding substantially to the costs of motoring in the UK. The hon. Lady was right to say that we need to establish the full facts and the reasons behind any increase, and to ascertain whether there are any consumer or competition issues that need to be addressed in order to improve the functioning of the market.

The Office of Fair Trading therefore issued a call for evidence in September. The OFT is asking insurers and others for their views on a number of aspects of the private motor insurance market that might raise competition or consumer issues. This is an important piece of work; it will improve the OFT’s understanding of the market and put it in a better position to determine whether there are aspects of the market that are not functioning well and how best to address the issues.

The OFT has been actively engaging with participants in the insurance market, trade bodies, the Government, regulatory agencies and consumer groups by issuing information requests. The research that the Consumer Council for Northern Ireland has done will be helpful in informing that process, and it is to its credit that it has carried out that work. I would encourage people to think about any evidence that they can provide. The deadline for written responses to the OFT’s call for evidence closed last week, but it is still open to contributions, and I am sure that it would welcome ongoing input and views. It plans to publish its findings in December this year, and will consider next steps in the light of evidence that it receives.

The hon. Lady focused on the cost of motor insurance in Northern Ireland, and talked about some of the factors that affect it. A research paper on the same issue has been prepared for the Northern Ireland Assembly. It strikes a slightly different note from that of the hon. Lady. It states that

“the relatively high rate of accidents and related casualties in Northern Ireland, combined with higher compensation levels and legal fees suggests that insurers do, in fact, face considerably higher costs when transacting car insurance in Northern Ireland.”

The paper goes on to say that

“the higher car insurance premium rates paid by Northern Ireland drivers might be reflective of higher risks and costs associated with transacting car insurance business here, rather than a discriminatory pricing regime.”

It is interesting to note that, having looked at the cost of motor insurance, the research paper goes on to look at the cost of house insurance, and to compare Northern Ireland with the rest of the United Kingdom. There is clearly a debate to be had about the costs, and the evidence provided by the Consumer Council contrasts with that in the research paper produced by the Assembly. That is why I think it is important for the OFT to look at those particular areas and to understand the reasons why premiums in Northern Ireland might be higher than those in the rest of the UK.

Underpinning the pricing of insurers is the use of risk-based premiums. Insurers take a number of different factors into account when deciding the level of premiums and those factors correlate with the risk being covered. For example, some insurers group postal code areas in order to ensure that all those in a similar risk area are covered in a similar way, but the level of data used in underwriting is a commercial decision for firms, which the Government do not seek to control.

While a postcode does not itself determine whether or not a person will make a claim, it can be an accurate indicator of the likelihood. It is often used in cases where there are hotspots for crash fraud. The three worst hotspots are not in Northern Ireland, but where fraud is used to trigger claims, driving up costs for insurers, those costs are, sadly, borne by all those who drive.

There are other issues. For example, the Government were very disappointed with the recent European Court of Justice ruling that the use of gender as a risk factor by insurers should not result in individual differences in premiums and benefits for men and women. We expect this to have a negative impact on consumers and lead to price rises for motor insurance for young women drivers who are seen to be a safer risk than young male drivers.

What we need to do is to tackle some of the underlying causes of costs for insurers. The hon. Lady was eloquent in identifying some of the reductions in road traffic accidents. She is right to point out that it is incongruous to see road traffic accidents falling in number when motor insurance claims are rising. There is an issue there, and we need to get to the bottom of it.

We are committed to the implementation of the Jackson proposals, including the reform of conditional fee arrangements and a ban on referral fees, which we believe will reduce the risk of frivolous claims. Clearly, as justice is a devolved matter, different arrangements are in place as between the mainland and Northern Ireland. The hon. Lady is right that we need to work with our colleagues in the Northern Ireland Executive to look at where there are differences in the legal regime that could be dealt with to help reduce the cost of claims.

We are looking at introducing a statutory ban on referral fees for England and Wales. Since 2004, when the Law Society lifted the ban for solicitors in England and Wales paying referral fees, people have been encouraged to make claims. That has led to personal injury claims rising at a time when the number of collisions and casualties on the road is falling, yet the number and overall cost of bodily injury claims has steadily increased. The hon. Lady spoke about whiplash claims earlier. It is estimated that they cost insurers about £2 billion each year—a cost borne, of course, by those who pay their motor insurance premiums.

As I have said, we are trying to tackle the issue of the payment of fees in England and Wales, but the prohibition remains in place in Northern Ireland. The hon. Lady mentioned that other people might also pay referral fees. The Assembly and the Executive need to think carefully about how to strengthen the current ban on referral fees in legislation. The hon. Lady should take that up with her colleagues.

Other issues drive up the costs of insurance. The hon. Lady talked about the number of young people who want to drive to work or to college to study. What is happening is that they are in part being priced out of the market, but uninsured driving adds about £30 to each insurance premium. We want to ensure that young people take out the insurance cover that they need to enable them to get to college, while tackling the number of young people who are not taking out insurance cover as a means of driving down the cost of insurance.

In conclusion, the hon. Lady has raised an important point. It is a complex issue, as her speech set out. We want to work with the OFT and with the Assembly and Executive to find ways to reduce the cost of motor insurance in Northern Ireland as well as throughout the UK. The OFT report is an important part of that. We want to work with stakeholders so that we get the right outcome to drive those costs down so that people can use their cars for leisure, education and work without paying through the nose for that privilege.

Question put and agreed to.

House adjourned.