Changing gear?

Recently, third party property damage and personal injury limits have been causing problems in the motor insurance industry, though the impact of the European Union Commission's draft Fifth Motor Insurance Directive is unclear.

The Directive proposes minimum compulsory third party liability amounts of EUR1m per victim, EUR10m per accident for property damage, EUR10m per accident for personal injury and EUR500,000 per victim. This all seems within the tolerance limits of the UK market, particularly given its current requirement for unlimited third party personal injury cover.

The concern for insurers is whether the UK government will amend the Road Traffic Act to reflect the proposed EU Directive. Currently, the Act requires insurers to provide unlimited cover for personal injury, and traditionally the motor insurance market has looked to reinsurers to provide the high level of indemnity required.

Limited exposure

However, in the wake of WTC and with rises in large claims, reinsurers now want to limit their exposure to areas such as third party property damage. Although the Act calls for a minimum limit of £250,000, most private car insurers and their reinsurers have traditionally provided unlimited indemnity. Reinsurers have now restricted this to £20m.

More worryingly, reinsurers have indicated they may no longer continue to offer unlimited third party injury cover. And, so far, the government has given no indication that it will amend the Act to remove unlimited third party injury cover and bring the UK more in line with other European countries.

Not surprisingly, insurers are beginning to feel the squeeze. If reinsurers will not provide unlimited personal injury cover, insurers will have to consider underwriting the full risk themselves.

The simplest course of action would be for the government to remove the requirement for unlimited third party injury. This would bring the UK's limits in line with other European countries and allow insurers and reinsurers to amend their policy limits in line with legislation. Even then, insurers might buy higher levels of cover to offer greater security to customers.

Brokers have a primary duty to customers to ensure they are placing business only with secure insurers and need to look at motor insurance partners' balance sheets and reserve ratios.

Much will depend on the extent to which limits are amended in the UK.

For instance, if the Act allows insurers to restrict limits to £50m and the reinsurance market provides this, the security of the motor insurer will not be an issue. In this case, the only task for brokers is to tell their customers that some policies cover the minimum legal requirement, over and above which the policyholder would be directly responsible. Other policies may offer a higher limit, which would give more protection to individuals.

The impact of these EU rules on motor policies will undoubtedly require brokers to provide a more detailed explanation to policyholders on the points of third party cover. As differentials in cover start to emerge, so brokers will have an additional role in identifying and explaining the required levels and best value for clients. This is particularly true for commercial motor business, in which differentials in cover for third party property damage are already common.

Class withdrawal

Brokers should also look out for hard-pressed insurers trying to cut costs. This could happen anywhere, from a change in the policy wording, to a hardening approach to claims or even withdrawal from certain classes of business.

Other aspects of the EU Commission's proposed directive have increased the pressure on premiums. For example, the Directive calls for the deletion of the excess in damage to property caused by an uninsured vehicle, which could result in an annual bill of £25m for the Motor Insurance Bureau.

And it has been estimated that the extension of cover for injuries to pedestrians and cyclists involved in motor accidents, whether or not the driver is at fault, would cost UK insurers between £100m to £200m a year.

These measures and the additional cost of reinsurance should make for continued motor premium price inflation but, at the same time, the market is becoming more competitive on price. Brokers should be aware of the mounting pressure this will place on motor insurers' reserves, as policyholders will suffer if there is a shake out in the market. And it is brokers that deal with customers when things go wrong, even when the causes are beyond their control.