I submitted to you an Explanatory Memorandum on this subject on 5 July 2002. At the time, I was unable to complete a Regulatory Impact Assessment on the measures proposed, because we had at the time no clear picture of how the measures would shape up as a result of negotiation. You considered the proposals at the 1110th sift and submitted them to Subcommittee A.

  Negotiations in the Council Working Group made little progress under the Greek Presidency. However, the pace has intensified in recent meetings, enabling substantial progress to be made, so that I can now give you a realistic assessment of costs and benefits. I am sorry that it was not possible for me to do so earlier. I now expect the proposed Directive to be an item in the Competitiveness Council meeting scheduled for 10-11 November. It would therefore be most helpful if the Scrutiny Committee were able to lift its scrutiny reserve before the date of the Competitiveness Council Meeting.

  I am now able to enclose a Regulatory Impact Assessment for the dossier. For the majority of these proposals, the benefits are likely at least to equal the costs in the United Kingdom. Wherever possible, the Government is seeking to obtain texts which secure a favourable balance of benefits against costs. In particular:

—  The Government is pressing for appropriate minimum ceilings for compensation, reflecting present market conditions and providing for an effective and not unduly burdensome process of updating these levels in future.

—  The Government is resisting strongly any attempt to introduce "no fault" compensation which is at variance with or requires fundamental change to national systems of civil liability.

—  The Government is pressing for the retention or introduction of appropriate "excess" thresholds (the financial amounts below which claims need not be compensated) so as to help ensure that fraudulent claims do not impose undue costs on honest motorists.

  A number of other questions were raised by the Commons Scrutiny Committee, and it may be helpful to you to know that I have answered these as follows.

What are the views of the interested parties in the UK?

  The insurance industry, in particular the Association of British Insurers and the Motor Insurance Bureau, has been kept closely in touch with the progress of the negotiation, in which the line taken by UK officials has reflected the representations which they have made. We have consulted, including meetings and correspondence, with others, including the Automobile Association, the RAC, the Cyclists' Touring Club, the Confederation of Passenger Transport, the Road Haulage Association and Lloyds Motor Underwriters' Association. Our line has reflected the representations made. The Cyclists' Touring Club believed that legislation which placed a general assumption (with appropriate safeguards) of liability on the driver in the event of a collision between a motor vehicle and a non-motorised user would result in much more responsible driver behaviour: they proposed a text on this point similar to one which UK officials have proposed in negotiation.

What view does the Government take on the issue of subsidarity raised by the provision for a direct right of action against the insurer in purely domestic, as well as cross-border, cases and on how any such issue is to be resolved?

  In the light of legal advice the Government are persuaded that: it is at least arguable that these provisions of the Directive are concerned with the establishment and functioning of the market in motor insurance, and that these provisions are properly based on Article 95 of the Treaty.

What matters of principle relating to competence are raised by this proposal, and how is any such issue to be resolved?

  The Committee is aware of the Government's general concerns relating to the provision concerning liability as regards pedestrians and cyclists. The Government will want this provision to be settled in a manner which does not affect the law of civil liability by introducing "no fault" compensation. The Government considers that such changes would go beyond the provisions of Article 95 of the Treaty, particularly as they affect purely domestic situations. As was pointed out in the original EM, however, the Commission has said that this is not the intention.

30 October 2003

REGULATORY IMPACT ASSESSMENT

Title of proposed measure

  1.  European Commission proposals for a Directive of the European Parliament and of the Council amending Council Directives 72/166/EEC, 84/5/EEC, 88/357/EEC, 90/232/EEC and Directive 2000/26/EC on insurance against civil liability in respect of the use of motor vehicles.

PURPOSE AND INTENDED EFFECT OF THE MEASURES

  2.  Purpose: to modernise some provisions of earlier Directives and to update compensation limits to allow for inflation.

  3.  Intended effects:

  3.1  To make it easier for motorists to move between Member States.

Measure proposed: removal of border checks on insurance, whilst removing anomalies (once an accident has occurred) connected with lack of registration of the vehicle or the bearing of false registration plates (Article 1, amending the first motor insurance Directive, Directive 72/166/EEC; and Article 5, amending the fourth motor insurance Directive, Directive 2000/26/EC).

  3.2  To provide a long-delayed update of compensation limits, in order to provide for inflation.

Measure proposed: new limits and a procedure linked to inflation for updating in future (Article 2, amending the second motor insurance Directive, Directive 84/5/EEC).

  3.3  To ensure that provisions for compensating victims of uninsured and unidentified vehicle accidents are harmonised and effective.

Measures proposed:

3.3.1  Compensation for victims of unidentified vehicles (Article 2, amendment noted at "Article 1.4").

3.3.2  Settlement of claims for unidentifiable vehicles (Article 2, amendments noted at "Article 1.5", "Article 1.6" and "Article 1.7").

3.3.3  Settlement of claims where the victim has suffered significant personal injury (Article 2, amendment noted at "Article 1.6").

  3.4  To make specific provision for compensation of passengers.

Measure proposed: Compensation for passengers—to make explicit that insurance cover may not exclude a passenger who knew or ought to have known that the driver was under the influence of alcohol or other intoxicant at the time of the accident (Article 4(1), amending the third motor insurance Directive, Directive 90/232/EEC).

  3.5  To make specific provision for compensation of pedestrians and cyclists.

Measure proposed: no fault compensation of pedestrians and cyclists (Article 4(2)).

  3.6  To make it easier for motorists to make longer stays in another Member State.

Measure proposed: cover to include the whole territory of the EU (Article 4(3)).

  3.7  To make it easier to purchase a vehicle in another Member State.

Measure proposed: insurance for use of vehicle being personally purchased in another Member State (Article 4(4) first insertion, "Article 4a").

  3.8  To make it easier to obtain insurance cover.

Measures proposed:

3.8.1  Branches of insurance undertakings may provide insurance services (Article 3).

3.8.2  Insurers to provide a record of claims to policyholders (Article 4(4) second insertion, "Article 4b").

  3.9  To ensure that claims against insurers can be made as easily and simply as possible.

Measures proposed:

3.9.1  Excesses not to be relied on against third parties (Article 4(4), third insertion, "Article 4c").

3.9.2  Direct right of action against the insurer (Article 4(4), fourth insertion "Article 4d").

3.9.3  Extension of the duties of representatives appointed under the 4th Directive (Article 4(4), fifth insertion, "Article 4e", paragraph 1).

3.9.4  4th Directive claims system—extension of "reasoned offer" procedure to accidents with no cross-border component (Article 4(4), fifth insertion, "Article 4e").

3.9.5  Services of the Information Centre to be available to local drivers involved in local accidents (Article 4(4), sixth insertion, "Article 4f").

3.9.6  Removal of existing prevention on insurance undertaking branches from acting as claim representatives (Article 3).

TIMETABLE

  4.  The Commission's proposals were published in July 2002. They have been under discussion for over a year in the Council Working Party "Insurance (Motor Vehicles)", with a view to bringing them to COREPER on 5 November 2003 and to the Ministerial Competitiveness Council on 10-11 November 2003. The proposals were voted on by the European Parliament's (EP) JURI group on 7 October 2003 and taken to the EP plenary on 22 October. No implementation timetable has yet been indicated, but it can be expected that Member States will be required to implement within a year or 18 months of agreement on a final text, with perhaps a five-year extension to enable Member States with difficulties to catch up with the revised minimum ceilings for compensation.

RISKS ADDRESSED BY THE MEASURES

  5.  The risks addressed by the proposed measures are that:

—  in a time of increasing movement across frontiers in the European Union, undue restrictions may be placed on motorists' mobility as a result of insurance checks and anomalies;

—  compensation limits will remain unrealistically low;

—  the mechanisms for compensation of victims of uninsured driving or of untraceable vehicles will be ineffective and/or unduly inconsistent from country to country;

—  in some countries, passengers of vehicles involved in a road traffic accident may not be eligible for compensation;

—  in some countries, provision for compensation may be inadquate for pedestrians and cyclists who are involved in road traffic accidents;

—  motorists who wish to stay for long periods in countries other than that in which their insurer resides may thereby incur undue difficulty or expense in ensuring adequate insurance cover;

—  motorists purchasing a vehicle in a country other than that in which they reside may find difficulty in insuring it prior to its registration in their country of residence;

—  motorists changing residence from one country to another may not be able to take advantage of a good "no claims" record;

—  undue difficulties may remain in the way of making and settling motor insurance claims where the claimant resides in a country other than that in which the insurer is established.

  6.  On the other hand, the measures as proposed create further risks, which the Government will seek to reduce through negotiations, as set out below. Most significant amongst these are the following:

—  An appropriate balance needs to be struck between the new levels of the minimum ceilings for compensation and the rapidity with which the new levels are to be introduced. Otherwise the new levels risk a lack of fiscal prudence by insurance companies and/or swingeing increases in premiums. To a much lesser extent, the same is true of the proposed five-yearly update of levels to reflect inflation: in order to achieve a smooth-running process of update, a period of grace after future updates is desirable so as to enable insurance companies to adjust their capital balances and financing arrangements.

—  The proposal to introduce no-fault compensation for cyclists and pedestrians involved in road traffic accidents has incalculable implications for road safety and for the costs of settling claims, because of its potential impact on national systems of civil liability.

—  Various existing provisions to withhold compensation at levels below a specified "excess" are omitted by the Commission's proposals. These "excesses" ought to be reinstated in an appropriate form in order to avoid imposing the cost of administering large numbers of fraudulent claims upon the MIB, and ultimately on honest motorists.

BENEFITS AND COSTS

  7.  Measures which ought to have neutral effect for the UK. It is expected that there will be no substantial benefit or cost for UK motorists or insurers from the following measures (as referenced for convenience at paragraph 3 above):

—  3.1, 3.2 (except as noted below with respect to 3.3.2 and 3.3.3), 3.3.1, 3.4, 3.6, 3.9.2, 3.9.3, 3.9.4, 3.9.5, and 3.9.6.

  8.  By and large with significant exceptions as noted below, these measures have negligible costs, or they reflect UK practice (either practice already in place or practice which would have been introduced without EU legislation).

  9.  However, in order to achieve overall neutrality of effect from this subset of the Commission's proposals, some significant caveats will have to be taken care of through negotiation and co-decision. In particular, the revised minimum thresholds for third party compensation for loss or damage to property need to be set at an appropriate level, with sufficient periods of notice to enable the industry to exercise financial prudence in adjusting to them.

  9.1  Level of threshold. Revision to the minimum ceiling for compensation for third party personal injury is unlikely to affect benefits or costs in the UK, since UK law requires third party personal injury cover to be for unlimited liability.

—  Any impact in the UK of the revised levels will arise from revisions to the minimum ceiling for third party property damage. Any impact is likely to be felt by business policyholders, because some present business policies have liability limited to the current UK statutory level.

—  The current minimum ceiling required by Directive 84/5 EEC is 100,000 euros (about £67,000) per claim, but in implementing that Directive the UK opted for a figure of £250,000 per claim (over three and a half times the European minimum ceiling) typical of the cover in commercial policies at the time. Typically commercial policies today give a ceiling cover of £5 million, although some are much lower down to the statutory minimum of £250,000.

—  One insurer estimates that, if it became necessary to increase third party property damage cover to £5 million per claim for all policies, then increases in premium would be of the order of £10 to £30 per vehicle per year. Some individual commercial "high risk" operators are likely to experience higher premium increases. A range of £15 to £100 has been suggested by one insurer, depending on the type of vehicle, the location and type of goods carried. Some policies apply lower levels of cover when a vehicle happens to be operating in a hazardous area or is carrying a hazardous load: these cases may attract even higher premiums.

—  The Government will seek to obtain appropriate provisions in respect of the minimum ceiling for third party property damage.

  9.2  Initial implementation period, and period of grace on future updates of levels. The immediate introduction of new minimum ceiling levels for compensation would not be consistent with financial prudence in the operation of the motor insurance market. It would impose an immediate additional cost on insurance companies (and ultimately on the customer). This would occur both initially on the implementation of the Directive and thereafter each five years when the levels are reviewed. It is understood that some Member States will seek an initial five year period of grace to cope with the substantial, but long overdue, initial uplift proposed. The Government will not dissent from this. Thereafter, the Government will seek an 18 month period of grace following each of the future five-yearly updates. Such a period would ensure (although many insurance companies would in practice operate more quickly) that insurance companies have sufficient time both to adjust the necessary capital and solvency levels and to ensure that their re-insurance treaties are negotiated to fully reflect new levels. Any shorter period could have significant cost implications for insurers.

  10.  Measures benefiting the UK without substantial cost. The following measures (as set out at paragraph 3 above) are expected to be beneficial to purchasers of motor insurance in the UK, either directly by improving the service received by the customer at negligible cost, or through their convenience to the UK insurance industry:

—  3.3.1, 3.7, and 3.8.

  11.  For all these measures we need to ensure that any required change will impose at most only small costs on insurer or insured. But there is little likelihood that any of these measures would do otherwise.

—  A particular concern has been voiced by the UK insurance industry about the proposal to oblige insurers to provide a statement of claims (paragraph 3.8 above). Whilst the industry fully supports the basic concept, it wishes to avoid the one-off costs of any change by ensuring that the requirement imposed is compatible with the existing usual UK practice. This practice is: for private motorists, to provide a statement of entitlement to a no claims discount to private motorists; and, for commercial policies, to provide on request a summary of claims experience. The Government will seek to obtain a text so far as practicable compatible with existing UK practice.

  12.  Measures which, for the UK, would yield costs outweighing any benefits. There are two such sets of measures: no fault compensation for pedestrians and cyclists; and removing or prohibiting the use of "excess" threshold in specific circumstances, including damage caused by unidentified vehicles, damage by uninsured vehicles, and third party claims settled by the guarantee fund (MIB).

  12.1  Article 2 of the Commission's proposal (paragraph 3.5 above) aims to provide a system of no-fault compensation for pedestrians and cyclists. So far as can be ascertained, the harmful effects of this provision as proposed are likely to outweigh by far any notional benefits.

—  European legislation may perfectly well require explicitly that cyclists and pedestrians may not be precluded from claiming against motorists' insurance, when the motorist is at fault in an accident. That would be consistent with existing UK practice, and the Government would support such a requirement, so long as it did not have other undesirable effects such as those outlined as follows.

—  However, the Commission's proposal appears to go very much further by seeking to achieve "no fault" compensation for pedestrians and cyclists involved in road traffic accidents; that is, compensation even when the motorist is not shown to have been at fault.

—  In the UK, the law of civil liability requires that compensation be paid in the light of a determination or apportionment of who was at fault. Such determination may be made, in cases of dispute, by the courts. In the law of France and Belgium, there is an underlying presumption in favour of the cyclist or pedestrian, although this can be mitigated by determining that the cyclist or pedestrian has committed "inexcusable fault", and it is this underlying presumption which the Commission appears to wish to extend across the Union.

—  "No fault" compensation would require major and undesirable changes to the national civil law of a number of States, including the UK. "Inexcusable fault" does not exist as a concept in UK law. Tinkering with the law of civil liability could have major and incalculable effects upon road safety, by drastically changing the balance of reciprocal responsibility between different categories of road user.

—  Because of these wider considerations, the cost and benefit equation is equally incalculable. But it has to be recognised that such tinkering with the law of civil liability could have knock-on effects extending beyond their implications for motor insurance.

—  An insurance industry cost estimate has been made, based on a worst-case scenario that no contributory negligence by the motorist would be allowed. It recognises that fraud would be likely to increase, and it makes an allowance for cases that are not pursued under the present arrangements. This puts the additional cost to UK insurers in the range £100 million to £200 million per year. To this should be added an estimate of some £13 million a year additional costs which would fall on the UK bus and coach industry as a result of claims which they would have to settle directly. Bus and coach firms frequently have a high "excess" threshold as a feature of their fleet insurance policies, so that many of their claims would have to be settled by the industry directly without reference to insurers.

—  There is particular concern about the likelihood of increased fraud. The temptation for claimants to invent accidents is likely to be increased. The bulk of this problem would lie not with serious injuries, but in a multitude of minor but costly claims where the evidence would be limited. As well as impacting on insurers' costs, the effect would also be felt by other services such as the police, hospitals and medical staff, because of the need for corroboration.

  12.2  Need to make appropriate provision for "excess" thresholds. The Commission's proposals would in three instances either directly remove provision to operate an "excess" threshold below which compensation payments need not be made, or deny to Member States the option to do so. Years of practical experience indicate that such "excess" thresholds are crucial in combating fraud and in cutting the ultimate cost of such fraud to honest motorists.

  12.2.1  Removal of Member States' option to limit compensation for damage to property caused by unidentified vehicles. The proposed new Article 1.6 (para 3.3.3 above) would prohibit guarantee funds (in the UK, the Motor Insurance Bureau the MIB) from refusing claims for damage to property where the victim has suffered significant personal injury at the same time.

—  This sounds on the face of it like a good idea, with obvious benefits to those suffering such damage. In order to reduce fraudulent claims, the prohibition is qualified by the word "significant": the definition of "significant" is left to Member States' national legislation.

—  However, we think that the Commission is mistaken in believing that this proviso will entirely eliminate the risk of fraud. Motor insurance fraud in the UK as a whole is estimated to cost the UK insurance industry £600 million a year. As worded, the UK insurance industry believes that the proposal will increase the incentives for such fraudulent behaviour, and that the benefit (ie the increase in compensation for honest claimant) would be outweighed by the cost of such increased fraud, which would have to be borne by all insured motorists via their insurance premiums. The MIB estimates that the additional cost would be £10 million a year if a "significant" injury was one involving a stay in hospital, rising to £15 million if any injury might be regarded as significant by the victim.

—  The Government will seek to maximise the scope for Member States to adopt an appropriate procedure in respect of recognising "significant" personal injury.

  12.2.2  Deletion of the excess for damage to property caused by an uninsured vehicle. Under the second motor insurance Directive, Member states may authorise guarantee funds to impose a 500 euro excess in the case of damage to property caused by an uninsured vehicle: the current excess under the UK's MIB arrangements is £300. This existing provision was introduced to alleviate the financial burden on guarantee funds. It has been deleted from the Commission's proposal (3.3.2 above).

—  The ability to impose such an excess plays a major part in containing the costs of guarantee funds. In particular, the administration expenses in dealing with small claims can easily outweigh the amount of the excess itself.

—  Should this proposal be implemented, the additional costs to the UK's MIB are estimated to be £25 million per year.

—  The Government will seek to have the existing "excess" provision (or an appropriate corresponding one) re-instated.

  12.2.3  Prohibition of excess for third party claims is proposed at Article 4(4), item 3.9.1 above. So long as this prohibition does not apply to the guarantee fund, that is, to the MIB, this proposal would have neutral effect on the UK. However, as worded in the Commission's text, the proposal does seem to apply to the MIB. It can accordingly be expected that its costs to the honest motorist will significantly outweigh its benefits, as argued above at paragraphs 12.2.1 and 12.2.2. The Government will seek to avoid this consequence by removing the guarantee funds from the scope of this proposal.

CONSULTATION

  13.  The insurance industry, in particular the Association of British Insurers (ABI) and the Motor Insurance Bureau (MIB—a key non-profit-making body in the UK involved in the settlement of "trans-frontier" claims), has been kept closely in touch with the progress of the negotiation. The line taken by UK officials has reflected the representations which they have made.

  14.  We have consulted, including meetings and correspondence with others, including the Automobile Association, the RAC, the Cyclists' Touring Club, the Confederation of Passenger Transport, the Road Haulage Association and Lloyds Motor Underwriters' Association. Our line reflected the representations made. The Cyclists' Touring Club believed that legislation which placed a general assumption (with appropriate safeguards) of liability on the driver in the event of a collision between a motor vehicle and a non-motorised road user would result in much more responsible driver behaviour. They suggested a text on this point similar to one which UK officials have proposed in negotiation.

  15.  The Department for Constitutional Affairs is actively involved in the negotiation, because of their responsibilities for civil courts and associated procedures.

SECURING COMPLIANCE

  16.  Compliance with the proposed measures may be achieved by means of Regulations in accordance with the European Communities Act 1972. The Government also intends to seek sufficient flexibility to be able to introduce conditions bearing upon the MIB through changes to its agreements with the MIB.

OPTIONS

  17.  By and large, the proposed measures are capable of being negotiated in a form at least acceptable to the UK.

  18.  However, there are significant uncertainties in respect of the Commission proposal to impose across the European Union a system of "no-fault" compensation for pedestrians and cyclists involved in road traffic accidents. The three possible courses of actions are to:

—  secure agreement to a revised text which avoids the pitfalls set out at paragraphs 11 and 12 above;

—  delete the proposal; or

—  secure agreement to a text which confuses the issue.

  19.  Of these, the third is not a sensible option. It would lead to confusion in the minds of road users, and probably to expensive litigation.

—  Our preference is to secure a text which avoids the pitfalls. This approach would have the merit that it would provide a satisfactory outcome to the negotiation by making clear throughout the Union the position of pedestrians and cyclists.

—  If agreement cannot be secured to such a text, then the fallback position is to secure agreement to delete the proposal. This has the drawback that the issue may be reopened by future proposals for European legislation.

  20.  As regards the proposed review of levels of compensation, in particular we agree with this. We are seeking an appropriate balance between the amounts agreed and the initial period allowed to the industry to implement the new levels.

  Revisions from the EP may affect the amounts; they may also stipulate if minimum ceilings apply per victim or per claim (whatever the number of victims), or to both as alternatives.

  The present EU and RTA requirements are both expressed per victim for personal injury; and per accident for property damage, as is the Commission's proposal. However, some subsequent proposals have been for much higher amounts (10 million and 5 million euros have both been mentioned as possible minimum ceilings for compensation for third party property damage), but expressed per claim (whatever the number of victims) rather than per victim.

SUMMARY AND RECOMMENDATION

  21.  For the majority of these proposals, the benefits are likely at least to equal the costs in the UK.

  22.  Wherever practicable, the Government will seek to obtain texts which secure a favourable balance of benefits against costs. This aim has particular relevance in three areas, where the costs, quantifiable or otherwise, would substantially outweigh any benefits if the Commission's proposals were followed in detail:

—  the Government will press for appropriate minimum ceilings for compensation, reflecting present market conditions, and providing for an effective and not unduly burdensome process of updating these levels;

—  the Government will resist strongly any attempt to introduce "no fault" compensation which is at variance with, or requires fundamental changes to, national systems of civil liability; and

—  the Government will press for the retention or introduction of appropriate "excess" thresholds (the financial amounts below which claims need not be compensated) so as to help ensure that fraudulent claims do not impose undue costs on honest motorists.

  23.  My declaration is made on the assumption that satisfactory outcomes will be achieved in negotiation along the lines set out above.

DECLARATION

  I have read the Regulatory Impact Assessment and I am satisfied that the benefits justify the costs.

30 October 2003

  In his letter of 30 October 2003, David Jamieson provided a Regulatory Impact Assessment, together with the answers to three further questions. I am now writing to let you know the outcome of the European Parliament's first reading.

  I attach a copy of the European Parliament's report, dated 28 October detailing the outcome of their consideration (not printed). Essentially the Parliament adopted 26 amendments to the Commission proposals. Following from that the Commission accepted six amendments which improve the wording of the proposed Directive and do not have any unacceptable implications for our current policies. A number of the amendments that the Commission rejected affect matters related to civil police or judicial legislation and go beyond the specific scope of the motor insurance directives. A number of the other rejected amendments dealt with the minimum amounts for insurance cover, however we believe that the present proposals are quite acceptable.

  As you are aware, this proposal is to be considered at the Competitiveness Council on 10-11 November. I am sorry that your Committee has not had more time to consider this proposal, and specifically the European Parliament's amendments, before it reached this stage.

4 November 2003