Motor Focus: Will it be scraps for insurers?

When the government announced a stimulus package for Britain’s beleaguered motor industry in April’s Budget, insurers could be forgiven for hoping it might also be a boost for them.

The motor insurance sector had £10.5bn net written premium in 2007, according to the ABI, But it is a difficult place to make money, with premium squeezed by price-comparison sites and costs increasingly raided by personal injury claims. Anything that raised premium incomes or cut claims costs was going to be welcome.

At first glance, the government’s “bangers for cash” had the potential to do both. Under the scheme, cars more than 10 years old could be traded in for a £2,000 discount on the cost of a new one. The government was to put up half the money (it said it would make £300m available before March next year) with the manufacturers making up the rest. If all the money was spent, that would mean 300,000 old bangers off the road, replaced by 300,000 new cars. Premium on the new cars would be higher, and claims costs lower, the result of enhanced safety features on the newer models.

It’s just over two months since the scheme started and motor manufacturers are already claiming that it is a success. The Society of Motor Manufacturers and Traders (SMMT), which represents the UK automotive industry, published figures earlier this month [6 July] for the first full month of the scheme.

Sales in June were 15.7% down on June last year, and although the figure represented the smallest decline since last July, it was considerably better than feared. During the month, 176,264 new cars were registered compared with 209,190 for the previous June – the SMMT had predicted in April that sales would drop to 153,000.

The Department for Business, Innovation and Skills, which is running the scheme, said that up to 8 July, 110,800 orders had been placed, but that these would be dependent on confirming eligibility and securing finance.

Whether this has translated into a boost for the insurance sector is a moot point. Most insurers say that it is too early to tell and that they have seen little or no impact on premiums or claims so far. But they differ in what benefits, if any, they expect to see in the long term. While the government is keen to claim any glimmers of hope for the motor industry, insurers believe it’s a much murkier picture.

One exception is Admiral, where UK pricing manager Rhodri Charles has noticed new car policies recover significantly. Last October, the number of new policies fell for the first time – and continued to drop until March, when they were 25% down on the same period last year. But in April the tide turned, and numbers rallied. “In June, the number of new car policies was running just a couple of percentage points lower than in June last year,” says Charles. “It seems fair enough to conclude the scheme has played a part in that, though it’s still a bit early – you never know if it will dip again in July. There’s reason to believe it’s positive but we don’t know the full picture yet.”

Michael Lawrence, personal lines sales director at LV Broker, says the scrappage scheme has had no impact on its motor income, but he does believe it will be a positive thing for claims. “What we really want is all the old bangers off the road as soon as possible,” he says. “It’s definitely a benefit to us because safety in newer vehicles is much better, with airbags and side impact protection systems. Older vehicles don’t have the same features. It will definitely help accidental damage and claims costs, though personal injury claims are still causing claims inflation. But these things take time to work their way through.”

People who swap to a new car are also likely to upgrade from third party, fire and theft cover to fully comprehensive, though this is only likely to add 15% to their premium as the market is so competitive. In any case, Lawrence points out, this will have a corresponding increase in risk so can’t be considered a pure increase in earnings.

Premiums on the new cars will not necessarily be that much higher either. Lawrence says that on the underwriting “age curve”, quotes for old cars are not necessarily that low.

“Cars tend to be more expensive to insure when new as they’re unfamiliar to the driver, slightly higher risk and expensive to repair. We prefer vehicles that are between four and seven or eight years old. After that, rates go back up as older vehicles tend to die off and perform worse.”

Neither does the scheme appear to be replacing like-for-like vehicles. The £2,000 discount will make the biggest dent in the price of the cheapest cars and, as you might expect, the SMMT’s figures show that the biggest increases in orders have been for the super-minis.

In June, they took a record 37.2% share of the market, with the Ford Fiesta the best selling model, and the Vauxhall Corsa in third place. Demand for minis such as the Ford Ka, Renault Twingo and Hyundai i10 grew by 145.4%.

Admiral’s stats back this up. In the top 10 of new car policies for June this year, small cars feature much more prominently than for the previous year, with the Ka overtaking the Focus and the Audi A3 entering the table. The former favourites in the small family car class were down – the Vauxhall Astra from 4th to 8th and the VW Golf out of the top 10 altogether.

This is the continuation of a long-term trend, driven by greater awareness of the environmental costs of motoring. The SMMT’s 10-year figures show super-minis increasing their market share from 27% to 34.1% by 2008, at the expense of the upper medium and executive classes.

Smaller cars tend to attract lower premiums, which will diminish any increases in insurers’ income. Take three large 10-year-old cars, each worth £1,000. According to sample figures provided by Admiral, insuring a Volvo V40 would cost £318.35, a Peugeot 405 £251.15, or a BMW 316 £209.15. If a customer trades them in for a smaller car, their premium remains around the same or lower, despite the much higher value of the vehicle. So that’s £257.45 for a £13,000 Vauxhall Corsa, £269 for a Ford Fiesta of the same value, or £199.70 for the new Fiat 500, retailing at £9,500.

Admiral’s Charles is also optimistic on another factor that could exert a downward pressure on premiums: “When people change their car, that’s when they shop around and look for the best deal. As an insurer prominent on price comparison websites, it’s in our interest for customers to be shopping around.”

As for the impact of the scrappage scheme on claims costs, this will take even longer to reflect in the figures – if it ever does. On the one hand, Charles believes that claims should fall for new cars not only because they have better safety features but because their drivers tend to be more careful. “The type of person who drives around in an old banger may be different in terms of the way they look after the car.”

But Dane Loosley, divisional claims manager at Allianz, is more sceptical. “I see no evidence that new cars crash less than old cars; that doesn’t figure in our world view. We don’t really see the scrappage scheme as having a significant impact, good or bad, on the insurance of cars. We insure cars whether they’re new or old.”

The age of a car isn’t the dominant factor in underwriting, he adds. “We don’t really pay too much attention to the value of the car. It’s related to the group rating, which will probably be the same for a Corsa that’s 10 years old or a Corsa that’s two years old.

“For underwriting, it’s more a case of the driver’s age and experience, and the postcode in which the car ‘lives and operates’. It’s not what happens to the car, it’s what people do with the car that injures property and other people.”

Insurers must offer unlimited third party liability, he says, which can dwarf the costs of even a total loss. To take an extreme case: in the Selby rail disaster of 2001, when a Land Rover swerved on to railway tracks in North Yorkshire derailing two trains and killing 10 people, the driver’s insurer was liable for the damages. Fortis and its reinsurers had to pay out £50m.

When he heard of the scrappage scheme, Loosley’s main concern was that the £2,000 trade-in would bump up the value of old cars that were written off, but these are excluded. Allianz will only pay the inflated market value if the owner has already signed an agreement with a dealer when the car is written off, as will Aviva, though neither has faced this situation yet.

The big question mark hanging over the scheme is whether it is actually stimulating demand for new cars, or merely bringing forward purchases. Even with the discount, a new car represents a significant outlay and will usually involve taking out credit. A new Ford Ka, for example, still costs £8,395.

“You might have groups out there that are willing to take advantage of the scheme, and they do that early on in the process,” says Charles. “Will we continue to see people taking advantage of the scheme in the months going forward?” August and September are traditionally the peak months for buying new cars, with March catching up since a second registration period was launched in 2001. It’ll be interesting to take another look at insurers’ figures in September