July 23, 2009

Since its introduction in April, the government’s scrappage scheme appears to have halted the slide in new car sales, but what effect, Insurance Times asked this week, is it having on premiums and claims?

With aggregators driving premiums south and PI claims pushing up costs, motor insurers are riding the bumpy knife and struggling to make money. Could scrappage somehow help?

The scheme holds out the hope of swapping up to 300,000 old cars for new, thereby boosting premiums and – thanks to newer models’ enhanced safety features – lowering claims costs. Bingo! In theory.

Is it working? According to Insurance Times, “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.”

A lone voice of outright optimism comes in the shipshape shape of Admiral’s UK pricing manager Rhodri Charles who says “In June, the number of new car policies was running just a couple of percentage points lower than in June last year,” leading him to conclude provisionally that the scheme is having a positive effect.

LV Broker sales director Michael Lawrence is not convinced scrappage is making a difference. “What we really want,” he told Times, “is all the old bangers off the road as soon as possible” because “safety in newer vehicles is much better, with airbags and side impact protection systems,” which should help reduce claims.

Premiums for new cars are not massively higher than those for old. The “age curve,” Lawrence explains, starts high, dips between four and seven years old, then rises again for failure-prone older vehicles.

People swapping to new cars are more likely to upgrade from TPFT to fully comp, adding 15% to their premium, he argues. But this extra premium entails extra risk.

The other catch is that crappage doesn’t typically replace like for like, with many scheme users opting for smaller cars. Super-minis, Times says, took a record 37.2% share of the market in June. This is backed up, the paper reports, both by Admiral’s new policy data (Ka overtakes Focus) and by Smut’s market share data (super-minis up from 27 to 34% in the last decade). And smaller cars, of course, mean lower premiums.

More people changing vehicles is potentially better news for some than others. Admiral Charles is generating twin-palm static at the prospect: “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,” he chuckles eagerly.

But will claims fall? Charles imagines all his shiny new customers in their shiny new super-minis will be tooling round gingerly, whereas, he supposes with lofty indifference: “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, has no time for such nonsense: “I see no evidence that new cars crash less than old cars,” he says. “That doesn’t figure in our vorld view.” The driver’s age and experience and the postcode count for more; but these too pale in comparison with third party liability costs.

Unlimited TPL can dwarf everything else, as in the 2001 Selby rail disaster where the driver’s insurer, Fortis, had to pay out £50m after a Land Rover derailed a train killing 10.

The big question, Times concludes is whether scrappage is actually stimulating demand or merely bringing forward purchases. Nobody really seems to know. “It’ll be interesting to take another look at insurers’ figures in September, Admiral Charles tells Insurance Times. Wont it just, though!



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