Last Friday the coalition UK Government announced that it intends to outlaw the practice of accepting a fee in return for passing on information of road traffic accident victims to solicitors, the so called ‘referral fee’.
Car Insurance premiums have been rising all year as the market hardens to adjust claims reserves.
A recent AA report of 40% additional costs to the average premium has sparked investigations into the industry by the FSA and OFT. On the same day as the announcements of the investigations are made the Government also announce that referral fees are to be banned.
To be fair, the OFT has been investigating anti-competitive practices and price fixing in the UK Motor Insurance market for nearly two years now, however since the ex-Justice Minister Jack Straw called claims management companies ‘pariahs’ and ambulance chasers in June this year, the association of higher car insurance premiums and the rising costs of claims, has been firmly established in the UK public’s psyche.
On further investigation by the British media it turns out that insurance companies themselves are the major benefactor of the referral fees and also the major provider of the personal data to the third party companies!
When insurance companies refer your data to an accident claims management company they receive anything up to £1000 per case. Because the fees cannot be awarded against the losing party, the cost of the fees is paid for by the accepting solicitors and cannot be recovered from the losing liability insurers. Effectively there is no subrogation of the costs and selling your data is a win-win situation for all the underwriting car insurance companies.
Admiral Insurance, which has many online faces including confused and elephant, has stated that because referral fees account for 6% of their profits, any ban will inevitably lead to higher car insurance premiums.
Paradoxically though it has been the major insurance companies that have been moaning about CFA’s and no win no fee solicitors for years in the industry press, enough to have sparked two major judical reviews.
So on the face of it, car insurance companies seem to have cut off their noses to spite their faces and the ban will almost certainly lead to higher car insurance premiums. The problem is that referral fees are only a symptom of the claims losses and not a component of the claims loss itself.
The Government obviously and mistakenly feel that if you remove the fee for ‘advertising’ or facilitating, then you will reduce the demand in the market. Car Insurance Blog believes this is very naive!
If people are injured then they will claim. The real problem with the rising cost of motor insurance claims is the total cost of whiplash claims and the hourly charges of civil solicitors, both of which should be capped at levels much lower than current.