Former justice secretary says it is unfair to rate drivers’ risk depending on where they live
Industry bosses have defended using postcodes as a criteria for underwriting after an attack on the practice by former justice secretary Jack Straw.
Straw warned insurers that they may lose their right to underwrite motor if they continue to use postcodes for ratings, saying that “parliament could take motor insurance out of the private sector”.
He said the practice was unfairly hiking motor premiums for his constituents in Blackburn, which has some of the poorest neighbourhoods in the north-west of England.
“My point is that the postcode is a very inadequate and crude surrogate for the pricing of this risk,” Straw told a Brokerbility audience at a conference in Leicester.
“It’s an easy one for the industry, because the data is available, but it’s wrong, and it has very serious social consequences if people are priced out of insurance.”
Straw said that postcode redlining also aggravated racial tension in his constituency, where many believed that the practice unfairly hiked up premiums in areas with a large proportion of Pakistani inhabitants.
Motor insurance is a social good, which parliament has let the private sector deliver, he said. “And that doesn’t mean private industry musn’t make a profit, but it does mean that private industry has to moderate the way it provides for certain risk in order to meet this social good,” he said.
Straw has been a powerful influence on government, having successfully lobbied for a ban on referral fees.
I don’t see anyone replacing postcode as a proxy any time soon”
Keith Morris, Sabre Insurance
Legislation proposed by Straw would prevent insurers “from isolating the level of risk arising from personal injury claims in an area smaller than Wales, or a standard English region”.
Straw made the proposal in a Ten Minute Rule bill. These rarely become law, but are often used by MPs to spread awareness about issues and judge support.
An ABI spokesman defended the use of postcodes for rating. “For motor it is only right to take into account where you live. But it is not the only criteria, it is one of many that insurers use,” he said.
Sabre Insurance chairman Keith Morris also backed the practice. He said using postcodes was one of the best proxies for understanding the exact risk posed by each driver, and that it made rating more accurate.
He said: “I don’t see anyone replacing postcode as a proxy any time soon, so I think it is essential we are allowed to keep it until we can get to those underlying factors.”
Insurethebox director Naeem Ali said: “Like a typical politician, Straw is tackling the wrong issue.”
Ali says politicians should look at making it harder to for fraudsters to make illegitimate claims, instead of focusing on postcoding.
“The reason the premiums have gone up so much in some areas is because these deprived areas have a lot of claims management companies. That essentially has stimulated the tendency to make these illegitimate claims,” Ali said.
“If there was more protection in the law regarding these claims, it would start to correct the problem.”
Pass notes: The alternatives
Which model does Jack Straw want insurers to use?
Straw is happy for insurers to use any criteria except postcoding. He wants this to include their age, driving experience, convictions, type of car, how they use the car and where they keep it.
What could help insurers do this?
One possibility is personal lines telematics. This technology records and logs how someone drives, giving insurers a very individual view of the risk, but has not yet seen widespread adoption.
Why is Straw so involved in insurance?
Backbencher Straw is on a crusade to clean up personal lines insurance, inspired, he says, by letters from his constituents in Blackburn.
Can he actually achieve anything?
Straw’s Ten Minute Rule bill on motor regulation calls for an end to postcode rating, new standards on whiplash and a ban on referral fees. It’s unlikely to succeed, but it will certainly raise awareness in parliament.