Fourth Motor Insurance Directive
Regulatory Impact Assessment
i. Issue
1. The Government intends to implement the Fourth Motor Insurance Directive. This requires all motor insurers to appoint representatives in each EEA State, other than their state of authorisation, to handle claims by persons who suffer loss or injury in a motor accident abroad. Each EEA State must establish or approve an information centre to keep a register of information covering all insured vehicles normally based in that particular State. It also creates a direct right of action against insurers. The Directive also requires that each EEA State establish or approve a compensation body responsible for providing compensation to victims in certain circumstances.
ii. Objective
2. The Directive is intended to make it easier for residents of an EEA State who have been victims of motor accidents in an EEA State other than their State of residence which are caused by the use of vehicles insured and normally based in an EEA State other than the victim's State of residence to pursue a claim.
iii. Risk assessment
3. Where a UK motorist has been the victim of a motor accident elsewhere in the EEA, the present system of claiming can be slow and difficult, resulting in much inconvenience and expense for UK citizens pursuing claims.
4. These obstacles may also discourage UK citizens from pursuing claims against foreign insurance companies. Thus they or their insurance company are forced to bear the costs of any damage arising from an accident in another EEA State.
iv. Options
5. Three options have been identified in relation to the Directive:
a) Take no action;
b) Implement the Directive;
c) Implement the Directive and implement Article 3 of the Directive broadly to also provide in certain circumstance for UK residents involved in motor accidents in the UK with a right to issue proceedings in the courts against the insurers of the person responsible.
Option a
6. It is mandatory that all EEA States implement the Directive into their national law. Were the UK not to comply, it would be liable to be fined by the European Commission.
Option b
7. The Directive requires EEAMS to provide persons who suffer loss or injury in motor accidents which occur in MS other than their MS of residence and which are covered by the use of vehicles insured and normally based in a MS, with a direct right of action against the insurer of the person responsible for the accident. Each EEA State is also to ensure that it is a condition of official authorisation that motor insurers appoint claims representatives in each EEA State other than that in which they receive their official authorisation. Claims representatives are to be responsible for the handling and settling of claims arising from motor accidents. The Directive also requires provisions to be made to ensure prompt responses are made to claims for compensation. EEA States must also establish or approve an information centre, which in the UK would be the Motor Insurers' Information Centre (MIIC), to keep a register of certain relevant information in order to allow victims to pursue their claims for compensation. The UK victim would contact the MIIC on their return, providing the responsible vehicle's registration number. It is then for the MIIC to contact the information centre in the responsible driver's state for the relevant insurer's details on behalf of the victim. Finally, each EEA State is required to establish or maintain a compensation body responsible for providing injured parties with compensation in specified circumstances. In order to implement the Directive the UK would have to pass legislation dealing with these various requirements.
Option c
8. This would implement the Directive and implement Article 3 of the Directive broadly to also provide in certain circumstances for UK residents involved in motor accidents in the UK with a direct right to issue proceedings in the courts against the insurers of the person responsible. The Directive will in certain circumstances give EEAMS who suffer loss or are injured in motor accidents in the UK a right to issue proceedings in the courts a right to issue proceedings against the insurer, whereas a UK resident involved in an accident in the UK cannot currently issue proceedings against the insurer direct. Option (c) is therefore intended to remove this anomaly.
9. The Government proposes to implement the Directive in accordance with Option (c).
v. Benefits
Option b
10. In 2000, 5.52 million EC residents visited the UK, 1.67 million of those in cars. The numbers of UK residents visiting the EC was greater - 14.8 million in total, including 8.33 million in cars. By sheer volume of visitors, UK residents are likely to make more claims against insurers in other EEA States under the Directive, than residents in other EEA States are likely to make against UK insurers. The numbers of visitors involved bears a relationship with claims experience and so the benefits to the UK are likely to exceed the costs imposed on UK insurers from claims against drivers by victims resident in other EEA States.
11. For UK residents who are the victims of a road accident when in another EEA State, it becomes much simpler and quicker to pursue a claim against a foreign driver. This new system will benefit the 15 per cent of UK motorists who take their cars abroad each year. We can estimate the savings for UK motorists through the Directive, in terms of time and legal expenses saved:
(Number of claims)(Hours pursuing a claim x UK average hourly wage) + (Cost of local legal advice x estimated number of claims) =
6000(5 x £10.66) + (£50 x 6000) = £619, 800
The above figure represents only benefits to UK victims. Residents from other EEA States will derive similar benefits if they are victims of accidents in the UK.
12. Under the current system, faced with an unfamiliar legal system in a foreign language, many claimants may have abandoned their claims. However, under the Directive UK claimants need only contact the UK information centre (the MIIC) on their return to pursue a claim. The simplification of this process should encourage more UK victims to claim. Based on ABI statistics, the weighted average private car claims cost to British insurers in 1999 was £1510. Projecting to 2003, when the Directive will be in effect, at 6% average annual claims inflation (calculated from ABI data), this gives claim amount per person of £1906 that would be foregone by abandoned claims if the Directive were not implemented. It is difficult to estimate how many motorists will experience these benefits; however it is likely to be a significant number.
13. Moreover, the benefits of the Directive will be backed by the Motor Insurers Bureau (MIB). If the insurer fails to appoint a claims representative; the responsible driver is uninsured; the vehicle cannot be identified; or if the insurer or the insurer's claims representative has not made a reasoned response to the claim within the timescale, the claimant will not suffer further delay. They will be compensated by the MIB, which will in turn recover the amount paid from the compensation body in the relevant EEA state. That compensation body may then turn to the insurer or driver responsible to recover its own expenses. This system should reduce delays in the claims process to the claimant significantly, leaving the procedural obstructions to the designated bodies.
14. The Directive should also assist rapid access to damage repair and early assessment of the need for medical rehabilitation, allowing better claims handling, and hence cost control, by the insurer.
Option c
15. It is estimated that 45,000 claims made under UK law by UK residents reach the courts each year. Introduction of a direct right of action in the courts under domestic law would potentially enable these proceedings to be pursued against insurers rather than the insured. This is likely to make little practical difference to how claims are handled by the courts, as at present the insurer is usually fully involved in the claim and effectively takes over its conduct at an early stage before any court proceedings are brought.
16. However, consultees identified some additional benefits through allowing the direct right of action in the courts. At present a person suffering injury or property damage as a result of a road accident is reliant on the cooperation of the driver apparently responsible to pursue a claim against that driver's insurer and claims can be frustrated if the driver fails to notify the insurer of the accident. Allowing legal proceedings to be served directly on the relevant insurance company would help facilitate service of a claim and assist in avoiding convoluted enforcement proceedings.
vi. Costs
17. It is clear from the consultation that it is difficult to provide accurate costs for the implementation of the Directive as proposed. What follows are best estimates supplied by the industry.
Option b
18. The costs to the UK of implementing the Directive will consist of:
Cost to insurers of appointing claims representatives
19. Each insurer (in 2001 there were 351 authorised insurers writing motor business plus 15 Lloyds syndicates) will need 17 representatives - one for each of the 14 other EU Member States, plus 3 EEA States which are not EU members.
20. Firms appear likely to comply with this requirement in one of two ways. Those that already have a presence in other EEA states are likely to make use of their existing contacts. (At the end of 2000, around 85 firms already had establishments in other Member States- though not all of these were motor liability insurers). This would effectively eliminate set-up costs, though there may be small frictional costs arising from familiarisation to the new system. Since an establishment will already have claims-handling capacity, there will only be a minimal increase in the potential continuing costs.
21. The second approach is likely to be to appoint representatives that will handle claims on a fee per claim basis. Informal indications are that a scale of fees increasing according to the complexity of the claim will be levied, ranging up to perhaps £350 or £400 (plus VAT).
22. The industry estimates that, during the year 2000, there were around 2,000 claims from injured parties in other EEA States which would be within the arrangements set up by this Directive. Even if (because of the simpler arrangements) claims doubled, the additional cost of claims representatives handling them would, on this basis, be no more than a yearly £2 million (before allowing for any countervailing reduction in the UK costs of handling such claims).
Cost of running the Motor Insurance Database (MID):
Cost to insurers
23. The MID was originally set up as an enforcement tool and the MIIC estimate that the overall costs to insurers of developing and setting up the comprehensive MID will be between £20 - 25 million. They estimate the operational costs at around £7.5 million. These figures include the MIIC estimate of the costs to insurers of extending the database to fully meet the requirements of the Directive (that is to include all vehicles - including fleet vehicles) which are: start up costs of £4.37 million; and annual operational costs of £2 million.
Cost to fleet owners and vehicle hirers
24. The Retail Motor Industry Federation estimates that the annual operational costs to the motor fleet trade will be up to £14 million. An estimate is not provided for start-up costs.
25. The Association of Car Fleet Operators have provided considerably lower estimates. They believe annual operational costs to the motor fleet trade will be around £6.75 million. They estimate start-up costs in the range £0.8-2.4 million.
Cost of enquiries to the Motor Insurance Information Centre
26. MIIC estimate the total annual cost of processing enquiries as £146,800. They intend to fully recover this cost by charging £10 per enquiry.
Cost of Direct Right of Action in the Courts
27. The great majority of motor accident claims settle without the need for any court proceedings in cross border cases. The costs of implementing the Directive itself therefore are likely to be minimal, given the very low number of cases which come to court at present. (The Motor Insurers' Bureau has indicated that on average the UK courts deal with less than 50 claims a year from residents living in other EEA States and the majority of these are dealt with in Northern Ireland). Most claims that could be made under the Directive are likely to be made anyway under the existing regime, bearing in mind the prevalence of cross-border legal expenses cover.
FSA Changes
28. In addition, in order to comply with the terms of the Directive, the FSA will be required to make amendments to its Handbook in relation to threshold conditions, and conduct of business requirements. In line with the requirements of the Financial Services and Markets Act 2000, the FSA has consulted publicly on proposals to make these changes; the consultation document included a full cost benefit analysis in respect of the changes that is proposes to make.
Option C:
29. Consultation responses did not provide any firm assessment of the likely costs of introducing a direct right of action against insurers for UK victims of accidents occurring in the UK. However, the Association of British Insurers (ABI) has indicated that it believes the cost impact on motor insurance is likely to be negligible (especially in terms of the impact on motor insurance premiums).
30. The ABI's view is that insurers may incur some extra cost in dealing with claims presented to them directly by the accident victim, especially if the number of unfounded claims rises as a consequence of the direct right of action or if their policyholder proves difficult to contact. It is also possible that claims costs will rise if the direct right of action leads to an increase in the number of well-founded claims, which have hitherto gone without proper compensation. It has also been suggested that Insurers may incur additional costs by amending existing policies to reflect the changes. However, amendments would be required in any event to reflect implementation of the Directive, and it has been suggested to us that these could be effected in the context of annual policy renewal and costs thus minimised.
31. The ABI believes that the early presentation of claims to the relevant insurer should ensure that they are dealt with more quickly, and in a way that avoids unnecessary legal costs and allows early access to suitable medical treatment where appropriate. The ABI also believe that the support of insurers for this proposal suggests that these factors will balance out or could even produce modest savings for insurers (and, in consequence to the motor insurance policy holder.)
vii. Impact on small businesses
32. The Treasury has consulted with several trade associations which represent the interests of smaller businesses in relation to the Directive. Among other bodies, the Treasury has consulted: the British Vehicle Rental & Leasing Association (BVRLA); the Freight Transport Association (FTA); the Motor Accidents Solicitors Society (MASS); the Retail Motor Industry Federation (RMIF); and the Road Haulage Association (RHA). The consultation responses did not indicate any adverse impact on small business. Any individual having an accident should benefit from the Directive and consequently any small business whose employees are involved in an accident will also benefit.
viii. Impact on competition
33. The potential impact upon competition in the motor insurance market has been considered using the Office of Fair Tradings 'competition filter'. This tool should highlight any possible adverse impact on competition arising from the Directive and the accompanying domestic legislation.
Competition filter
Q1: In the market(s) affected by the new regulation, does any firm have more than 10 per cent market share? Yes. In 2000, the largest firm held 13.1% of the motor insurance market.
Q2: In the market(s) affected by the new regulation, does any firm have more than 20 per cent market share? No.
Q3: In the market(s) affected by the new regulation, do the largest three firms together have at least 50 per cent market share? No. In 2000, the largest three firms held 36.6% of the motor insurance market.
Q4: Would the costs of the regulation affect some firms substantially more than others? Yes. However, these will be in proportion to the share of the motor market they hold. Although larger firms will have higher costs than smaller competitors, the cost burden will be proportionate, having regard to their comparative size.
Q5: Is the regulation likely to affect the market structure, changing the number or size of firms? No. The costs are not heavy and the regulations should not encourage motor insurers to enter or leave the industry.
Q6: Would the regulation lead to higher set-up costs for new or potential firms that existing firms do not have to meet? No. All firms will have to comply with the requirements of the Directive.
Q7: Would the regulation lead to higher ongoing costs for new or potential firms that existing firms do not have to meet? No. The level of costs for all firms will be determined largely by their turnover of clients and hence of information.
Q8: Is the market characterised by rapid technological change? No. The market for motor insurance provides a fairly consistent range of products across all companies.
Q9: Would the regulation restrict the ability of firms to choose the price, quality, range or location of their products? No. The regulations would have no impact on insurance products themselves.
34. Overall, the filter suggests that the impact of the new legislation on competition will be negligible. Therefore a detailed competition assessment is not required.
ix. Summary and recommendations
35. The benefits of the Directive arise mostly from a simpler and faster claims procedure. Individuals are relieved of following a lengthy and inefficient process of pursuing claims against foreign insurers. Instead, insurers and other firms will manage this process in a systematic and more efficient manner and the Directive will now facilitate claims which might otherwise have been dropped. For the private motorist, benefits are mostly intangible: convenience, simplicity, speed and peace of mind. The estimated value of these benefits was around £620,000.
36. It is easier to estimate the costs of implementing the Directive since this involves tangible expenses: these costs arise mostly from setting up and maintaining information centres and the motor insurance database. The set-up costs have been estimated at between £20.8 million and £27.4 million, with most of the burden falling on insurers. Annual running costs are estimated at between £15.25 million and £23.5 million, which will fall evenly on insurers and motor fleet dealers. However, the above cost estimates are subject to some uncertainty; most likely on the downside.
37. These costs are small in relation to motor insurers' annual premium income (which in 2001 was £10.9 billion, according to ABI figures).
38. It is expected that the cost impact of a direct right of action in the courts will be cost neutral.
39. It is therefore recommended that the Government implements the Directive in accordance with option C.
x. Consultation
40. Consultation has taken place with the Motor Insurers Bureau, Motor Insurers' Information Centre, the Association of British Insurers, the Financial Services Authority, motor insurers, trade associations and other bodies. The consultation period was twelve weeks, ending on 17 July 2002. In all, 34 responses were received. The FSA has consulted on implementation of its rules. Consultations closed on 30 September 2002.
xi. Enforcement, sanctions, monitoring and review
41. An Order under the European Community Act will establish an offence of failing to comply with requirement to provide relevant information to the Information Centre. Requirements implemented by changes to FSA rules and threshold conditions (to appoint claims representatives and respond to claims within 3 months etc.) will be enforced under the FSA's existing monitoring and enforcement powers under the Financial Services and Markets Act 2000. Under these powers, the FSA may take action against insurers who breach their rules including fining, and ultimately withdrawal of permission to carry on the business. Persons will also be able to sue motor insurers directly for breach of certain of these FSA rules.
I have read the Regulatory Impact Assessment and I am satisfied that the benefits justify the costs.
Signed by the responsible Minister
Ruth Kelly MP, Financial Secretary to the Treasury
Date: 28 October 2002
Contact Point:
Banking and General Insurance Team
HM Treasury
1 Horse Guards Road
London SW1A 2HQ
020 7270 1389
Paul.McGhee@hm-treasury.gov.uk
