Age restrictions

Imagine this. You’re thrilled to pass your driving test, you’ve negotiated long and hard to buy a perfect first-time car, but then your dreams are shattered by an insurance premium quote twice the value of your vehicle. That’s exactly what happened to Peter Green, who says he was quoted £5,055 by Churchill for a second-hand Renault Clio.

“Not only was I a 19-year-old male with no claims bonus to call upon, but my parents also had never needed insurance as they had always driven company cars. So I couldn’t even go on their policy,” Green says. Eventually he found a £2,400 quote through A-Plan Insurance, but adds: “To call it an expensive drain would be an understatement – it’s costing me £200 a month.”

Green is one of the lucky ones, however. Each year, thousands of young drivers, in particular 17-21 year-old males, are left high and dry by unaffordable premiums. Research by Insurance Times found that Aviva Direct would charge a 17-year-old, first-time driver with a 10-year-old Ford Mondeo more than £9,000. But at least Aviva, along with RSA, Quinn and a handful of Gibraltan insurers, are still open for business.

Tight corners

In a desperate search for cheaper quotes, teenagers are opting for the aggregator route. Business for the general broker has almost dried up completely, although some specialist brokers are still pulling in premium and finding innovative ways to help.

Meanwhile, insurers are showing no signs of a let-up in aggressive rate increases after years of heavy losses in the motor market. The latest AA shoparound index reveals that premiums in the 17-21 age bracket are on course to increase by 45% in the year to 30 October 2010. AA Insurance believes that prices have been recently pushed up by Quinn’s re-entry into the market, as it is offering much higher premiums than in its pre-administration days.

The biggest problem is the well-documented bodily injury claims inflation, which has exploded in the past two years because of fraud and aggressive claims farming. Statistically, young drivers, especially males driving between 11pm and 5am, are most likely to be involved in costly accidents. Aviva director of trading Phil Bayles says the cost of a life-debilitating crash can be prohibitive, even for the big insurers.

“It would not be that unusual to see a £10m claim for a car accident involving young drivers and passengers,” he points out. “Insurers are not the bad guys. They’ve spent millions of pounds on young drivers, because as a group they are mainly responsible for the large motor accident claims. That’s why car insurance premiums have gone up.”

Locked out of the market, some youngsters are taking the law into their own hands.

Motor Insurers’ Bureau chief executive Ashton West says that ‘fronting’, when a young driver is put down under the parent’s insurance but ends up being the main driver, is becoming a common occurrence. “There’s an increasing problem with fronting, and people need to know it’s illegal.”

Ashton believes that young drivers are also keying a variety of information into aggregator sites to get the best premium quotes. He says: “If you speak to the price comparison websites, they will tell you about the amount of playing around with these numbers that goes on.”

Perhaps the greatest fear is that young drivers won’t bother getting insurance at all. But AA director of car insurance Simon Douglas warns would-be uninsured drivers: “Number-plate recognition equipment on police cars and at the roadside quickly identifies uninsured vehicles, which can soon result in prosecution and the car being confiscated and crushed.”

All these fraudulent activities are ultimately leading to bigger claims and bigger premiums, creating a vicious circle.

Scarce cover

Caught up in the net are many potentially responsible and well-behaved young drivers, tarred with the same brush. This in turn creates problems for the independent broker when called upon to find cover for teenagers.

Nick Moger, founder of Provisional Marmalade, a specialist intermediary that has unique arrangements for learner drivers, is in discussions to help brokers. “They keep ringing us and asking for help. I had one Manchester broker, quite a big one, with a chief executive as a client, who has an 18-year-old child. He said he couldn’t get insurance below £6,000 and wanted some help. A lot of commercial brokers do not normally want to turn a big client down.”

Moger believes the average independent broker of any size would like some arrangement with insurers so that they can place young driver business.

Biba head of technical services Peter Staddon says: “In the old days, brokers used to have a very good, buoyant market. I would like to see insurers support brokers to a high degree, more than they do now.”

Yet there’s little help coming; insurers have steadily been pulling away from the higher-risk, young driver portion of the motor market, and those that remain are increasingly preferring to work with specialist brokers rather than generalists. One independent broker, who did not want to be named, told Insurance Times that their young driver account had almost completely dried up in the past 18 months. Another said he hadn’t engaged with the segment for five years.

AXA personal lines managing director Mike Keating believes that if insurers manage to carry those large rate increases direct, there’s no need to find extra distribution in the broker space.

“Those insurers that are getting the 45% to 50% rate increases will be happy to continue that book. I don’t think it’s likely that any broker-insurer will be moving into the young driver segment at the moment,” he says.

Keep it niche

While generalist brokers may be losing out to direct insurers or aggregators, a stable crop of business is being handled by specialist motor brokers, such as Allen & Allen Group and Adrian Flux.

These specialists say that business is good as customers turn towards their expertise. Typical clients are parents who, perhaps not so keen on the internet, will pay that bit more for expert advice and guidance.

Allen & Allen chief executive Tony Allen says: “We’re always open for business with young drivers and, in fact, we seem to be insuring more at the moment."

Summing up the state of the market, he adds: “I think there is a rate, and the ones that were there 18 months ago were totally inadequate.

“But I don’t think people at that time realised, although it’s easy to say in hindsight, that all these claims would start to fly out of the woodwork.”

As the motor market reshapes itself, the winners will be those insurers that can carry through rate increases to beat the claims and the fraud, along with specialist brokers.

And the young drivers such as Peter Green??All they can do is swallow the costs now – and wait patiently for their 22nd birthday. IT

Hi-tech solutions

Some specialist brokers are working with telematics devices, which are placed in the driver’s vehicle to record their driving habits. The idea is that if young drivers can prove they are driving responsibly – such as not between 11pm and 5am – then they will be rewarded with cheaper premiums.

New brokers have sprung up specifically geared towards telematics. At the forefront of this new wave of technology is a company called i-kube, bought by intermediary Motaquote, and underwritten by RSA. Drivers aged between 17 and 25 who sign up to the deal could save up to 40% on their insurance.

Insurethebox is a close rival, started up by EMB founder Mike Brockman. The Catlin-backed company charges per mile and gives free extra miles for careful driving. Customers can access these firms direct or through brokers.

The technology is in renaissance after suffering a bad start. Aviva embarked on the project but dumped the technology two years ago, complaining that the price of the kit was too expensive for both the customer and insurer to share. The reborn telematics market is only a recent phenomenom and market penetration is low.

But Aviva director of trading Phil Bayles now has faith in the product. “There comes a tipping point where the price of technology goes down and the cost of insurance goes up, and it becomes worthwhile. I think we are at that stage now,” he says.

Provisional Marmalade founder Nick Moger doesn’t believe telematics is the be-all and end-all solution, however, because youngsters dislike the concept. “Young people see it as a big restriction on their lifestyle. We’re talking about people who have fought in Iraq, for example,” he explains. “Youngsters do not like it at all, but they go for it because they can’t afford anything else.”