The UK motor insurance market is a broken model and the government should now consider moving away from the age-old tort based system as it is clearly not working for either the insurers (with loss ratio continuing to be above 100%) or their policyholders (increasing premiums).
News this week that the UK's Office of Fair Trading has provisionally decided to refer "a dysfunctional private motor insurance market" to the Competition Commission should come as no surprise to any one. In a recent market study, the UK government found that insurers of drivers who are at fault in a road-traffic-accident have little or no control over the way in which subsequent necessary repairs and vehicle replacement services are carried out or the associated costs. The study reveals that such "uncontrolled" costs are inflated, on average, by £560 each time a vehicle of the not-at-fault-driver is repaired.
Is it now time to seriously consider the notion of no-fault motor insurance similar to the model in use in New Zealand? The funding of such a scheme would be through a combination of levies on petrol/diesel and vehicle registrations all administered through a centralised agency. Such an agency, with a wealth of experience in handing personal injury claims, already exists in the UK - the Motor Insurance Bureau (MIB). In addition, the MIB is experienced in setting the required levels of funding required to meet such claims (albeit from the uninsured driver perspective).
Criticism of such "no-fault" compensation systems points to the increased moral hazard problem. But is this really any different than the current "at-fault" model where the "good" driver is still paying for the "bad" driver through higher (and impartial) premium levels? The (poor) moral hazard associated with the use of motor vehicles will always exist until driver mentality changes. This can only be done through a more focused effort around road safety, accident management and improved rehabilitation services. As such, the introduction of a new no-fault model could eliminate the uninsured driver problem, lend itself to new safety initiatives and the prevention of injury - with a consequent reduction in future annual funding levies ("premiums) as improved driving habits flow through into a lower number of road traffic accidents and their associated costs.
While I don't see a sudden change in direction, the reoccurring motor insurance crises has reached a point where the net effect of our private motor insurance is - by default - much the same as a no-fault scheme except for one small, but important difference. A controlled and properly funded no-fault motor compensation system would create certainty, control run-away costs and more importantly, generate a host of direct and indirect social benefits for insurers and insureds alike.
The question is, will the all powerful insurance lobby, allow such reforms? Given that they continue to lose money for their shareholders with the current motor insurance model, I would ask why not?