Business Ideas?Bloodthirsty' lawyers haunt UK insurers
UK motor insurers, including Aviva Plc, Admiral Group Plc and Fortis Insurance Ltd, thought they had found a way to squeeze out extra revenue when their customers get into car crashes.
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Four years later, the practice is costing them 18 times more than it earns and is helping to drive up auto premiums at the fastest rate on record.
British insurers offer customers involved in an accident, that wasn’t their fault, a replacement car and free legal advice. In return for directing these customers to law firms and to car-rental firms such as Helphire Plc, the insurer typically receives from law firms and car rental firms a fee of up to £900. The aggressive pursuit of payouts by car-hire firms and lawyers from the insurer of the at-fault driver has bumped up claims across the industry, adding 10 per cent to the cost of car insurance, or about £82 ($136) a person, the Association of British Insurers said.
“It’s such an appalling and inefficient process which adds nothing but cost and more noses in the trough feeding from those costs,” said David Williams, managing director of claims at Paris-based Axa SA, Europe’s second-largest insurer. “Referral fees are so close to being a kickback it’s astounding.”
British insurers haven’t made an underwriting profit, which excludes investment income, for at least 11 years. They receive about £100 million a year from car-rental companies and lawyers, according to the Accident Management Association, which lobbies for the car-rental industry. The problem is that it costs insurers even more when their customer is the driver at fault and they are on the paying end. Referral fees have fuelled a surge in legal fees and car-rental charges that’s costing the industry as much as £1.8 billion a year, according to Axa.
Royal Bank of Scotland Group Plc, the UK’s biggest car insurer through its Direct Line and Churchill brands, said claims costs grew 21 per cent to £941 million in the third quarter compared with a year ago.
“Driven in part by bloodthirsty lawyers, and in part by a recession, there is a spike across the industry in people making bodily injury claims in the motor book,” RBS Chief Executive Officer Stephen Hester told analysts on a November 6 conference call.
While insurers agree that payments to car-rental companies and personal injury lawyers, which aren’t illegal, are helping fuel claims inflation, the companies are at odds over a solution.
Axa and Aviva are trying to reach agreements with rivals to cap the costs of car hire. Fortis, which sells insurance through Marks & Spencer Group Plc, is developing its own replacement-car service as a cheaper alternative to using external firms, director Rob Smale said in an interview.
Admiral, which makes half its profit from undisclosed “ancillary” earnings, doesn’t plan to abandon the practice. “We see this as the way the industry is and we are part of the industry,” CEO Henry Engelhardt said in an interview at his office in Cardiff, Wales. “We’ll do what we have to do to survive in this environment.”
The referral payments are costing consumers in the UK. The average car-insurance premium rose 5.6 per cent to £821 for an annual comprehensive policy in the three months to September 30, the biggest quarterly jump since the Automobile Association Ltd. began tracking rates in 1994.
Insurance companies, “whilst very critical of referral fees, are very good at becoming the recipients of them and dictating what the fees are,” said Martin Heskins, civil justice policy adviser at the Law Society, which represents British lawyers.
Insurers, motor garages and brokers can earn up to £400 for each non-fault driver they refer to car-rental firms, said Alan Gilbert, Helphire’s group technical director. The fee for directing a customer to a personal injury lawyer can be as much as £900, Axa’s Williams said.