29/10/2013
Policy Update – Initiatives to Reduce Claims Costs
[Check Against Delivery]
Thank you to Infoline for the invitation to be here with you this morning for today’s comprehensive examination of the UK’s motor insurance claims environment.
To cover off in detail the wide range and scope of all of the policy initiatives underway to reduce motor claims costs is a tall order. So I hope you will forgive me in advance if I don’t cover the topic that you are particularly interested in or if I cover it in less detail than you were hoping. I’m happy to provide further detail in questions or in discussion afterwards.
Background and context
In understanding where we are today, it’s useful to understand where we have come from. So I’m going to start with a bit of context and background.
We all know that times are tough and although the recent growth numbers were encouraging, the state of the economy remains a cause of real concern. Now, more than ever, affordability matters. Insurers recognise that car insurance is a compulsory purchase. And we recognise that the increasing cost of insurance over recent years has been a cause of real concern for many people in the context of stretched household budgets.
And it took sharply increasing car insurance premiums several years ago for the Government and consumers to realise that the regulatory balance in the legal services market had swung too far in the wrong direction. That balance is in the process of being restored and I will talk a bit more about that later. The Competition Commission is currently undertaking a review of the private motor insurance market following a referral from the Office of Fair Trading. The Government continues to look closely at what it can do to help address the UK’s whiplash epidemic. And the ABI continues to be at the forefront of a number of initiatives to help our insurance company member firms manage their claims costs in what it is a fiercely competitive marketplace.
And asking and answering difficult questions of ourselves is something insurers have been doing. I’ve talked at other events in recent months about how motor insurers have been taking a long, hard look in the mirror. The reflection has not been an attractive one. Some of our own practices have led consumers to doubt their trust in us, question whether we are an industry with integrity and ask whether they can be confident that we operate in a way that is fair.
That is not a great place to be.
But the powerful role that an effective trade association can play is to work with its members to address the difficult questions and work to deliver change. Change for insurers, change for the claims environment and change that will deliver positive consumer outcomes.
A changing legal environment
And when speaking of change: April saw the introduction of some of the most significant changes to the UK’s legal environment that we have seen for some time. The Legal Aid, Sentencing and Punishment of Offenders Act (LASPO) 2012 came into force, bringing long awaited and much needed reform. As you know, many of the changes introduced by the Act resulted from the carefully considered recommendations of Lord Justice Jackson’s review of the civil litigation system. The ABI has long supported both the integrated and holistic implementation of the Jackson reforms and the LASPO legislation. By changing the “no win no fee” system and the “have a go” compensation culture it encourages, important behavioural changes should be introduced into the system. LASPO’s full impact is still being worked out. The Act has only been in force just over six months and many in the market are still adjusting to the new world it represents.
One of the most hotly debated areas of the legislation was the ban on referral fees. I have said before that it was 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 insurers 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 the ABI 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 continue to look at IT interfaces; end to end claims handling models; other new and innovative schemes; and whether there are gaps in the law or between regulators 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. Ultimately, each firm will make their own decision about what is in their; and their customers’, best interests and time will tell how the market develops. But for me there are more important issues to focus on than referral fees.
What has made a real difference to the market though is the Government’s decision to reduce the fixed legal fees claimant solicitors can receive for filing low-value RTA personal injury claims. Insurers made a very public commitment at the Prime Minister’s insurance summit last year that cost savings would be passed on to consumers. And all the available evidence, whether from the AA, Towers Watson or other sources indicates that is exactly what has happened.
The question is whether, in the absence of further reform, the premium reductions that consumers have enjoyed this year are sustainable over the medium term. Most commentators seem to think insurers have over-assessed the longer-term impact of LASPO and reduced fixed fees. Even more so in an environment where general damages awards have gone up significantly: not only was there a 10% increase as a result of LASPO itself but the Judical College Guidelines introduced a further 10% increase in general damages.
As I have said on many occasions before: high compensation awards added to the high cost of getting that compensation to claimants equals high car 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. If we collectively want lower premiums for all, then we need to have the debate about the level of compensation awarded to the few.
As an industry we need to continue to make the case for further reform. The small claims track limit was last considered in 1991 when 50% of personal injury claims were within the SCT threshold. Today around 9% of cases fall to the SCT. Last week the Government released a response to their consultation on reducing the number and cost of whiplash claims. They decided that now was not the right time to increase the limit of the small claims track to £5000.
But the response was quite clear: the Government accepted that there are good arguments for extending the limit but that now would not be the appropriate time. That’s probably understandable given recent reforms. But not now does not mean not ever.
And our challenge as an industry will be to demonstrate how the SCT can be increased in a way that protects access to justice. We need to demonstrate the importance of consumer education on how they might file claims in a new system. We need to demonstrate how the mandatory use by claimant and defendant representatives of software based damages calibration tools (incorporating all settled claims not simply those that end up in court) will mean insurers can’t take advantage of vulnerable claimants. And we need to demonstrate how those not able to easily file a claim themselves will be protected. So there is much still to do.
The Government’s response did, however, set out their desire to reform the system of medical evidence used in RTA claims. That is warmly welcomed by insurers who have long argued that there is a need for more financial independence, a need for an accreditation framework for practitioners and a system of peer review of medical reports. Naturally the devil of how any new system might work will be in the detail.
There were some challenges to insurers in the Government’s response and, as an industry, we will need to work through what our response to those challenges is going to be. For example, the issue of pre-med offers was raised. Insurers have no faith in the current medical reporting framework. The Government has accepted the reasons for that and will introduce change. So I think there is the possibility to discuss ending pre-med offers in the future. But in order for that to be delivered, the system for medical reporting will need to be designed and implemented correctly and medical reporting fees will need to be incorporated into Civil Procedure Rules.
If we are to make progress on these complex issues, all stakeholders will now need to get together to help the Government develop the new framework. The decisions on medical reporting have been taken. Now is the time to get on with the job rather than seeking to rehash the debate that has been going on all year.
Competition Commission – replacement vehicles and credit repair
Another debate that has been going on all year has been the Competition Commission’s enquiry into the private motor insurance market. 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.
The Commission accepted the argument that their work should not involve personal injury given some of the reforms I have just discussed. But the credit hire and repair markets are both sectors that have been problems facing the motor insurance market for years.
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.
We will soon know what the Commission views as the way forward when they publish their provisional findings next month. Our hope is that their work will result in credit repair and replacement vehicle markets that increases insurers’ control over the costs of claims, reduces the cost of motor insurance for consumers and improves the level and quality of service insurers offer their customers. That is what a well-functioning market should deliver.
Other areas of change
Young drivers: There are other important areas of work that we’ve been focused on in the claims environment.
We have been continuing to campaign for reform to the way young people learn to drive. The current system is outdated and not fit for purpose. Young people are paying the price for our continued failure to act.
Our work to see the young driver testing and training system changed is not just about an industry looking to save some money. Naturally, if there are fewer tragedies involving young drivers there will be fewer claims for insurers to pay. That’s a given. What the ABI’s campaign is about is the insurance industry taking a thought leadership role on a public policy problem that successive Governments have swept under the carpet for far too long.
Our campaign is about explaining that the high insurance premiums young drivers are asked to pay is simply a reflection of the risk they pose. And it is about getting politicians, the media, the Police and young people themselves to stand with us to make the case for reform.
The Government has indicated that they will release a Green Paper before the end of the year. We will continue to make the case that all options should be discussed including graduated driver licencing.
Vehicle recovery and storage: The recovery, storage and salvage of damaged vehicles are also areas that we are striving to improve. In comparison with some of the other areas I’ve discussed the cost savings are relatively modest. But these areas can be the industry’s shop window with customers. So we are continuing to improve the efficiency of these areas to improve the consumer’s relationship with the industry.
Recent improvements include working with industry to improve the notification process to insurers following an accident and the drafting of a guidance document to enable the swift recovery of cargo. And we are currently working to ensure that the Salvage Code remains a robust and practical document in light of the proposed changes to the Vehicle Identity Check Scheme.
Tackling fraud: Fraud remains a key issue for the industry. In 2011, insurers detected £441 million in fraudulent motor insurance claims and we estimate that a further £1 billion went undetected. As an industry we have adopted a zero tolerance approach to the fraud which drives up costs for honest customers. That is why we continue to invest heavily in tackling fraud through the Insurance Fraud Enforcement Department IFED, Insurance Fraud Bureau and the Insurance Fraud Register. We are also investing significantly in the development of a No Claims Discount database for motor claims. This will simplify the verification process for NCDs, thereby reducing application fraud and insurer costs, which will ultimately benefit consumers.
Third Party Assistance: The final thing I will mention is the work we are doing to strengthen the ABI’s Code of Practice on Third Party Assistance. This is a voluntary, self-imposed good practice guide for insurers who are dealing with unrepresented claimants and it supplements existing regulation. In the context of the challenges posed by the new legal environment, we recognise that as an industry we need to make sure consumers remain adequately protected. So we are undertaking a piece of work to ensure that the existing Code remains appropriate and investigating whether we can go further. We will make announcements on what that work results in later this year.
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. Insurers don’t create the society in which we live. They price their policies according to the environment they find and that is an important message for both Government and consumers to understand.
The evolution of the claims environment will 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.
Thank you.