Hefty increases in the cost of motor insurance could result in insurers receiving greater political and media attention. If it starts, it could spread to other areas of insurance. The industry needs to be prepared. Now is the time to be considering pre-emptive action to counter possible criticism.

Motorists have taken a hammering and they are not happy. Consumer groups are being formed to try to force down the price of petrol. Boycotts and action days could heighten the profile of motoring issues.

The Government has started to take note. The indexed extra tax increases on petrol have been dropped. There were some pro-motorist policies in the recent strategic transport review. The inflation rate has increased as a result of higher petrol prices: not good as we approach a general election.

With an annual mileage of 9,000 a year, motorists are paying around £1,200 a year now for their petrol. I must be a pretty sad person because I keep my receipts and generally always go to the same garage. So forget your Government statistics, I know the truth and have the written proof.

An outrage!

At this time two years ago I was paying 65.9p per litre for unleaded. Last year it was up to 72.9p, a rise of 10.6%. At my garage today it is 84.9p a litre – it has fallen in the last month but it is still 16.5% up on last year. An outrage! No wonder there are boycott attempts and suggestions that the Government may lose the next election.

What else has gone up dramatically for motorists in the last year? In July 1999 the average cost of comprehensive cover, using the AA price index, was £464.27, to be precise. This July it was £561.24. An increase of 20.9% or, in tabloid press terms, a scandal costing motorists an extra £2 a week.

An industry critic might question the massive increases and ask what the Government intends doing about it.

Does it result from the big industry consolidation? The largest five motor insurers controlled under 40% of the market three years ago and now it is over 60%.

Are the increases the result of industry profiteering now or incompetence in pricing in the past? Have claims been increasing dramatically or are the statistics right in suggesting claim frequencies have fallen? Is fraud rife and not being tackled adequately?

These are all potential criticisms of the industry but none have any validity. Motorists have in the past benefited from ultra cut-price insurance.

In the last three years motor insurers have paid out on average £1.20 for every £1 of premium collected. As a result of intense competition that just could not continue.

Personal injury claims have increased dramatically with more claims for much greater amounts. There has been little debate as to whether such increases are warranted and can be afforded. These payments have to be directly reflected in premium increases.

Government also taxes insurance premiums highly. Insurance is exempt from VAT so it is not possible to reclaim a large part of the VAT insurers pay out in claims. In addition, insurance premium tax is a direct additional burden.

If IPT was abolished and replaced with VAT on insurance premiums (it is currently not allowed under European law), policyholders would be over £1bn better off.

Motor insurance is little more than a compulsory commodity. The intense competition among the 80 or so insurers makes sure the public gets an excellent deal. Customer service too needs to be good to retain business. And innovation is essential. There is evidence of both but this needs to be better set out and promoted.

There are good reasons for higher premiums. They need to be known and communicated by everyone in the industry, especially those whose job it is to tell motorists the bad news of premium increases.

The industry needs to explain what it is doing and why with one consistent and strong voice.

  • Tony Baker was deputy director general of the Association of British Insurers and now runs his own independent consultancy. He can be contacted on 01920 465000 or email: thetbaker@aol.com

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