Higher Premiums as Car Insurance Firms sell Personal Details
Published: 27 June 2011 By Julian Stone 2 Comments
Motorists face higher premiums as personal injury claims rise – partly due to insurance companies selling personal details to lawyers and firms specialising in accident claims.
Car insurance is expensive enough, so most motorists won’t be amused to learn why they’ve been paying higher premiums – despite a fall in the number of road traffic accidents that result in personal injury.
The reason is that the cost of personal injury claims has doubled over the last decade from £7 billion to £14 billion – aided by the insurance companies themselves, who have been selling on clients’ personal details to lawyers and firms specialising in accident claims.
The referrals can earn the insurance companies between £200 and £1,000 each, but the increased number of personal injury claims are expensive – and the costs are passed on to car insurance policy holders as higher premiums.
Car insurance scandal
Worryingly, many of the payouts are for whiplash injuries, which can’t be detected by scans or X-rays – opening the door to potentially fraudulent claims. The figures certainly seem to be out of kilter when you realise the insurance industry pays out £2 billion annually for whiplash injuries while the NHS spends only £8 million treating them.
The scandal was uncovered by former Justice Secretary Jack Straw, who said on Radio 4’s Today programme that a friend had been bombarded with texts and calls from an accident claims specialist. They had been advised to claim for a whiplash injury – even though they had not suffered whiplash in the minor accident they’d been involved in.
As a result of a probe into industry practices, Mr Straw discovered that car insurance companies weren’t the only ones selling on details of people who’d been involved in accidents – even the police and hospitals have been cashing in on referral fees.
More expensive car insurance premiums
The result is more expensive premiums in areas where personal injury claims are most common – putting honest motorists at a significant disadvantage. “It is the economics of a madhouse, where the law-abiding public is penalised,” said Mr Straw.
The Association of British Insurers’ Director General Insurance and Health Nick Starling said: “We are pleased that Jack Straw has joined our call for referral fees to be banned.
“It is not right that people take cash for tipping off lawyers about accidents which fuel personal injury claims, driving up costs for all motorists.
“They must be banned as part of a whole package of civil litigation costs reform which includes looking at solicitors’ fixed fees and hourly rates.”
Moneyhighstreet comments: “When people take out a car insurance policy, they don’t expect their personal details to be sold on by their insurers – let alone sold on by the police or hospitals.
“But the sad fact is that, because referral fees are profitable, insurers are taking advantage of them before they’re snapped up by others. With a growing culture of personal injury claims – some made in highly dubious circumstances – it’s the honest motorist who ends up out of pocket by paying higher premiums. We hope that the sale of personal details becomes properly regulated and spurious claims begin to fall.”
“And with already-expensive car insurance premiums being inflated in this unnecessary way, it’s more important than ever to shop around for the best deals and check price comparison websites regularly.”
Any examination of the accident industry will find the complex but tottering edifice that has been built, created or evolved to deal with accident claims — held together with the dubious quality cement of “referral fees” which are endemic in the industry, encouraging storage charges that were never necessary, repair costs that are higher than they should be, credit hires that were not needed, injuries that never were.
“Graft” has infected the system to the advantage of no-one, certainly not to the insured drivers who ultimately pick up the bill.
It is particularly ironic then that insurance companies faced with tightening margins brought about by price comparison sites chose to close down their own claims departments and outsource their “Accident Management” for the most part selected one or other of Helphire and Accident Exchange, both of which were born of the credit hire industry and retain credit hire at their operational core.
Hence when a driver involved in an accident “phones their insurer” they are usually placed in the hands of a company which is primarily a credit hirer — the one entity which has an inbuilt financial interest in extending the duration of a non-fault claim and massively increasing the costs.
The credit hirer/accident manager controls who gets the repair, the pace of the repair and sells on any injury, encouraging any victim of a non-fault bump to make a claim. It is they that have built up the “referral fee” edifice and enmeshed so many interests within it that there is a culture of concealment and hardly anyone is willing to seriously criticise a model that has clearly gone wrong.
In theory at least everyone is in favour of banning referral fees. The Association of British Insurers campaigns against them but one is reminded of a cleric preaching against sin to a nodding congregation – only for the congregation to leave the church and carry on sinning as they were before.
The reality is that under the current system insurers are the major beneficiaries of referral fees and insurance premiums collected have not covered payouts since 1994. According to Deloitte this year insurers will pay out £1.20 for every £1.00 collected in premiums, up from £1.19 last year. That leaves a hole that must be filled from somewhere and it is largely referral fees that fill the £2.4bn industry gap. John Spencer, a former chairman of the Motor Accident Solicitors Society, has estimated that insurers and brokers will receive up to £3.2bn in referral fee income and £1.6bn in ancillary services income in 2010 and 2011 alone.
The ABI does not collect records of referral fee income and most individual insurers hide them in a larger pot but as part of its 2010 UK car insurance results, Admiral, which does not include a breakdown of the amount earned from referral fees, reported £142.4m in ancillary income and profit of £275.8m. When the Legal Service Board recently announced it would not be supporting an immediate ban on referral fees on 31st May 2011 it triggered a rise in Admiral’s share price climbing 36p to 1723p.
The irony is that for all their inflated credit hire charges, both the insurance industry’s “preferred accident managers” Accident Exchange and Helphire both remain financial basket cases, the former delisted in 2010 and now propped up with Morgan Stanley money, the latter crashing to sub 4 pence a share in early May and resolutely flat lining ever since.
How could it be that companies who control the vast majority of claims traffic in the UK and charge what many would consider to be extortionate rates for hiring out replacement cars could be in such a financially precarious position? The answer may be that much of what they do comprises “directing the traffic” and the ultimate destination for referral fees are their insurance company clients to whom they pay dearly and who have both their snouts and trotters firmly in the referral fee trough.
Despite what the tabloids would have us believe not every personal injury claim is questionable and many claimants genuinely incur harm. If no referral fees for legal work are payable a lawyer should be able to provide top service at a reasonable rate acceptable to all parties. The problem is that in around 50% of personal injury cases the insurer has a financial interest is “selling on” the claim.
What the Department of Transport Select Committee called the “claims merry-go-round” is still turning and one wonders which of the major insurers will be brave enough to step off? Thus far the Legal Services Commission has fudged the referral issue but the government may yet take a view.
It is a commonplace, usually from people who benefit the most from referral fees, to say that banning them would drive them underground.
The reality is that no respectable insurer and no respectable law firm will continue to follow the referral model if they are told to stop. Payments may indeed still continue to be made but these are more likely to be at a level so as to properly reflect “value added” and the amount of work being done.
Once the motoring public comes to understand that their motor insurers are complicit with their “bogeymen” of credit hirers and “ambulance chasing solicitors” in driving up insurance costs they may well demand the end of current accepted practices with sufficient clamour for the government to be forced to take action and sweep them away.
So it is possible — and one hopes likely — that Mr Straw’s intervention can drive forward a model where loss adjusters evaluate liability and damage, bodyshops repair vehicles, hire car companies provide replacement vehicles at sensible rates, legal firms deal with ULR including injury if necessary and insurance claims departments settle claims.
And efficient companies do not have to hammer their costs down to unsustainable levels. And service providers do not have to pay backhanders to get the work.
We were involved in accident 2 years ago in which my daughter suffered whiplash injuries. Over the next few days we were rung by lots of people – doctor, physio clinic, car body shop, car hire company, insurance company and solicitors. It took us two weeks to realise that there were two firms of solicitors, only one of which was appointed by our insurance company. The others were cold calling freeloaders wasting our time without ever explaining who they were or how they would be paid. We had to contact our insurers to find out which was the legitimate firm.