25/06/2013
Thank you to Market Force for the opportunity to be with you this afternoon.
I’ve been asked to focus my remarks today on the future of motor claims in a dysfunctional market. It’s a phrase often used to describe the market – by politicians, the Office of Fair Trading and indeed by the ABI ourselves.
So it is worth exploring where and how we think the market can improve so that it operates in the best interests of consumers. And what can be done to change things for the better, both in terms of claims handling but also in terms of reducing premiums.
I’ve also been asked to say a few words the role of referral fees in inflating claims – a discussion that never seems to go away despite the ban coming into force three months ago. And finally to cover what insurers think of the Ministry of Justice’s recent reforms and where to next. It’s a lot to try to cover in the time we have, but I will try.
Is the motor market “dysfunctional”?
When I became the ABI’s Head of Motor Insurance just over three years ago I was struck by the number of issues the market was facing. There was a palpable sense of hand-wringing at the state the industry was in - whether in relation to the increasing number and cost of personal injury claims, the political and media scrutiny of increasing car insurance premiums or the perennial problem of credit hire. Insurers’ costs were skyrocketing at a time when investment returns were at all-time lows and the industry’s combined operating ratio was awful.
Things had to change. But to deliver any change, the industry first had to take a long, hard look in the mirror. And the reflection wasn’t pretty. Change would only come if we, as an industry, admitted that we had a problem.
And that we have done. I have said before that we are an industry that has significant work to do in terms of improving the trust consumers have in us. We have paid a heavy reputational price for some of our own practices whether in the credit hire, repair or personal injury space. Insurance is an industry where trust and integrity are critical to consumer confidence. And that is something where we as an industry have serious room for improvement.
I lead a small and hard-working team at the ABI who are focussed on helping the industry improve consumer outcomes. A key part of our work is to challenge insurers and practices within our industry. I don’t think our work will be complete any time soon. But we have made some real progress in recent years.
Competition Commission – replacement vehicles and credit repair
When it comes to credit hire and repair, both sectors have been problems facing the motor insurance market for years. And by market I mean the multitude and range of actors operating in the claims supply chain – including, but not limited to, towing firms, claims management companies, insurance brokers, credit hire firms and insurers themselves.
Everyone knows that the supply chain adds huge unnecessary cost to the at-fault insurer whose opportunity for meaningful challenge of those costs is limited. That is a market that is not functioning well. Ironically, it has been competition law that has prevented insurers taking more decisive action to manage these costs.
The General Terms of Agreement sought to put some disciplines around the cost of credit hire but that was a long, difficult and expensive process. It is what it is – a negotiated outcome that is voluntary for subscribing credit hire organisations and insurers which sets rates for replacement vehicles but at a rate far above what can be achieved by an insurers negotiating directly with a replacement vehicle operator. It’s not perfect but it’s something.
But there is more that can, and should, be done. Which is why we have worked with insurers, the Office of Fair Trading and the Competition Commission to get things more focused on what is in the best interests of the customer.
In our discussions with the OFT, we argued strongly that the private motor insurance market should be referred to the Competition Commission. For an industry that manages risk, that is not a natural place to be. My hope is that the Commission’s work will result in recommendations for reform of the whole market which will consider regulation of those actors in the supply chain that merely add unnecessary frictional cost to insurers. Costs which are, of course, inevitably passed on to consumers through increased car insurance premiums.
The initial signs are promising. The Commission’s consulted on their Statement of Issues and the outcome of that has been a focus, in their language, on their first “theory of harm” in relation to the separation of cost liability and cost control.
We anticipate that the Commission will publish their Working Papers on the key issues in the inquiry soon.
Many in the market will be working through the papers over the coming days and weeks and there will be hearings held with the Commission next month. Our hope is that their work will result in credit repair and replacement vehicle markets that increase insurers’ control over claims the costs of the claims, reduce the cost of motor insurance for consumers and improve the level and quality of service insurers offer their customers. That is what a well-functioning market should deliver.
Personal injury and referral fees
I said earlier that insurance is an industry where trust and integrity are critical to consumer confidence.
And it has been a major self-inflicted blow for insurers to participate in a personal injury claims market involving a merry-go-round of referral fees and other unnecessary costs. Even more so when referral fees merely served to increase personal injury claims frequency which we have so often highlighted as a key factor resulting in increasing premiums. This has fundamentally shaken consumer, media and political confidence in motor insurers. And that is why we made the case, provided the evidence and supported the Government banning referral fees.
Given the sums that were sloshing around the system to pay referral fees, I suppose it comes as no surprise that people are looking at IT interfaces, end to end claims handling models and other new and innovative schemes to get around the ban.
I understand that people need to focus on the bottom line. And I understand that removing referral fees has changed the personal injury landscape. But what I don’t understand is why people don’t ask themselves whether paying referral fees is the right thing to do. Whether trying to get around the ban is in the spirit of the LASPO reforms. Or whether going back to the bad old days is really in the customer’s interest.
There are also plenty of people saying that new Alternative Business Structures offer an opportunity to get around the ban. That may be true for some. But insurers who have decided to enter into an ABS arrangement are doing so in order to improve their offering to consumers, to help those in need of filing a genuine personal injury claim and to put some disciplines on their wider supply chain. Given that insurers are operating in a market that is undergoing – and continues to undergo – significant change, the question is whether it is worth paying the legal, regulatory and reputational cost of establishing an ABS simply to retain some referral fee income?
And, of course, every ABS needs to be approved by the Solicitors Regulation Authority which has made it abundantly clear that they will not authorise any arrangement designed to subvert the referral fee ban.
Ultimately, each firm will make their own decision about what is in their; and their customers’, best interests and time will tell how the ABS market develops.
But for me there are more important issues to focus on than referral fees.
Building on the MOJ reforms – what more needs to be done?
Which takes me on to where we are with the MOJ reforms and where we need to go next.
LASPO represents a critical first step in the getting the UK’s personal injury compensation system back to being fit for purpose, although by saying back I imply that it was ever fit for purpose in the first place. As I said earlier, people are still adjusting to the post-LASPO world and that world is now one where fixed legal fees for low-value RTA claims have been reduced, despite a desperate last ditch attempt to derail the reforms by APIL, MASS and that covert claimant organisation, the Law Society. We will also see the scale of the Portal increase to £25,000 for RTA claims next month at the same time as it’s scope is expanded to cover EL and PL claims so there is still some change to come.
But if the goal is to deliver an efficient and cost-effective personal injury compensation system, there is more that can and needs to be done.
The Government has recently consulted on improving the quality of the medical evidence used to support whiplash claims and increasing the small claims track limit from £1000 to £5000. Last week, I gave evidence to the Transport Select Committee which has re-opened its inquiry into whiplash with a focus on the MOJ consultation. It is clear that members of the Committee understand the issues – my hope is that their report seizes the opportunity to make recommendations for meaningful reform.
Fundamentally though, there is little doubt there is a need for a wider public policy debate about the UK’s whiplash epidemic.
Insurers don’t create the society in which we live. They price the risks that society presents. High compensation awards for whiplash injuries added to the high cost of getting compensation to those who are injured leads to high insurance premiums. So we need an open and honest public debate about the level of general damages that should be awarded for whiplash injuries and other low-value personal injury claims. Clearly there are implications from changing our current compensation system. But if we collectively want lower premiums for all, then we should have the debate about the level of compensation awarded to the few.
I’m not talking here about special damages for the genuine costs of rehabilitation or care. What I am talking about is the right to receive significant compensation for simply being in an accident. An accident that may have caused little or no harm. And in the case of minor whiplash, an injury the claimant can’t prove they have sustained. Fundamentally, the question society needs to ask is whether a minor, low-speed shunt in a supermarket car park justifies thousands of pounds in compensation. Whatever the outcome of that discussion, insurers will provide the agreed level of compensation to claimants and build that into car insurance premiums.
As I said, this is a debate society needs to have. But it needs to be a grown-up debate: with analysis rather than anecdotes and evidence rather than emotion. And so it needs to be a debate in stark contrast to the public policy discussions we’ve witnessed in recent years in getting to where we are today.
Conclusion
In conclusion, it is clear that the motor claims environment has been through a significant period of change over the last two years and the ABI and insurance industry have been at the forefront pushing for a better claims environment that delivers for consumers. The evolution is likely to continue as the LASPO reforms settle down, further changes to the civil litigation system take place and the Competition Commission reports on their inquiry into the private motor insurance market. With all of this work we have to focus on what is in the best interests of the premium paying consumer. Ultimately it is they who matter most.
So thank you for the opportunity to be with you today and I’m happy to take any questions you may have.
Thank you.