When company car driver David Jones (not his real name) was involved in an accident, he was left with a written off Volkswagen Golf and a sore shoulder and thumb. Relieved to have walked away from what was a high-speed, heavy impact crash on a motorway, he got on with the process of informing the insurance company and sorting out all the details.

That, he thought, would be the end of the matter – the insurers would sort out who was at fault and the claim would be resolved. Not many years ago, that would have been the case, but no sooner had Jones informed the insurer of the accident than he received a phone call from a firm of solicitors who wanted to take up his case and arrange a medical examination. Suddenly, Jones was being sucked in to the ‘no-win, no-fee’ claim culture – that sore shoulder would be classified as whiplash after a less-than-stringent ‘medical’, the solicitors between the parties would fight it out and he would receive some compensation. All of it with no risk to himself.

That, in a nutshell, is the great big mess that the insurance industry now finds itself in – a merry-go-round of parties all looking to take some profit out of a motorist’s misfortune. It’s also where the insurance companies have tried to place the blame for the fact they have had to put up their prices so much in recent years – a 12% increase in premiums, including fleets, between 2009 and 2010 and a further 9% rise last year, according to figures from the Office of Fair Trading.

Unfortunately, this doesn’t hold much water, especially since Parliament got involved through a Transport Select Committee established to ascertain why motorists are paying so much more for their insurance (an average increase of £90 per policy) when the number of accidents on Britain’s roads is actually falling (Department for Transport statistics for 2010, the latest full-year figures available, show a 6% drop in reported RTA casualties and a 17% reduction in fatalities).

The main problem is referral fees, money paid by claims management companies/ legal firms to insurers for information on accidents – this is paid almost as an introduction fee so the motorist who may be injured gets sucked into the legal system and makes a personal injury claim.

As an example of mixed-up thinking, referral fees are essentially insurance companies inviting law firms to sue them. Most insurers (three cheers for AXA, the only major insurer which has banned referral fees, claiming they are ‘immoral’) will sell details of their clients who have been involved in accidents to law firms or claims management companies.

At an average of £800, according to a Parliamentary report prepared in August 2011, referral fees are a nice earner for insurance companies. Conversely, it also ends up costing insurers eventually when they have to pay compensation (plus associated costs such as inflated third party repair costs and credit hire vehicles – see p.43).

Even the Association of British Insurers, the voice of the UK’s insurance industry, wants to see referral fees banned. Nick Starling, its director of general insurance, said: ‘Referral fees should be banned altogether and not just made more transparent (as the Transport Select Committee suggested) – and that ban should apply to all organisations receiving them, not just insurers. Banning referral fees and, crucially, reducing legal costs will improve the situation for customers.

‘It is absolutely critical that Britain’s whiplash epidemic is tackled once and for all, and the Select Committee’s acknowledgement that the bar to receiving compensation for whiplash is too low is a step in the right direction.’ 

The ABI also wants to see action on legal fees associated with injury claims, something it has labelled ‘unaffordable, unsustainable and unacceptable’. It estimates that drivers are now paying the equivalent of £1,666 per minute in legal fees in settling low value motor personal injury claims of up to £10,000.

Labelling the current compensation system ‘dysfunctional’, the ABI also believes that a ban on referral fees will enable solicitors’ fees to be reduced to more realistic levels, with the knock-on effect being lower insurance premiums for fleets.

This is the outcome which was agreed last month when David Cameron hosted a meeting with representatives of the insurance industry: insurers pledged to pass savings on to customers following a Government commitment to reduce the current £1,200 fee that lawyers can earn from small value personal injury claims.

There was also a commitment to adjust premiums to reflect any reduction in legal costs created through the Jackson reforms (a series of measures suggested by Lord Justice Jackson which include lawyers no longer being able to recover success fees and after-the-event insurance from losing defendants, plus success fees capped at 25% of damages awarded in personal injury cases, as well as the banning of referral fees).

But while the Government has stated that referral fees will be banned, it has recently announced that the implementation of the Jackson reforms will now not take place until April 2013, and even then it has to go through the Commons and House of Lords as part of the Legal Aid, Sentencing and Punishment of Offenders Bill.

So, from April 2013, referral fees will go and the whole market will be ethically and financially corrected, right? Well, not quite, because the proposals as they stand feature significant loopholes, and if any profession is adept at finding loopholes, it’s the legal industry which itself has a lot to lose if referral fees are banned.

Richard West, head of the liability division at major law firm Kennedys, believes law firms could seek to pay to receive “services” in receipt of injury claim case referrals. ‘Such firms would therefore receive ‘for free’ the claimant injury cases,’ adds West. Such services which might be used as ‘payment’ include training, risk management assistance and business consultancy from those referring the claims.

It would appear that the adage of “where there’s a blame, there’s a claim” will still ring true, no matter if and when the Government takes action.

WHIPLASH: A real pain in the neck

Whiplash accounts for 70% of motor insurance personal injury claims in the UK, according to figures from the Transport Select Committee, and there’s a good reason why: whiplash is very hard to prove as a real injury.

Whiplash has no concrete medical symptoms that doctors can diagnose; instead it relies on injured drivers saying they’ve got it. This has fuelled the growth in claims over the years, many of them spurious, as people seek compensation through no-win, no fee legal firms.

According to Government data, the NHS spends around £8 million a year in treating whiplash and other soft-tissue injuries, yet insurers pay out approximately £2 billion in compensation for the same conditions.

The Government wants to raise the burden of proof in these cases and is about to embark on studies that will examine the evaluation of muscle damage following a typical low impact road traffic accident.

A spokesman said: ‘New medical developments and also broader expert opinion on the possibility of whiplash at low speeds or below certain force levels should be examined. These have the potential to deepen our understanding of minor soft tissue injuries.

‘The burden should then switch to the claimant to prove that an injury exists, rather than an insurer having to disprove it. In practice, it is simply too easy for a claimant to secure a medical report stating that they are suffering from whiplash – the doctor has no means by which to prove or disprove, so medical certificates are provided with minimal investigation.’ 

Ultimately, the Government wants a fairer system whereby people with real injuries caused by the actions of others are compensated, but fraudulent claims are filtered out.

Referal fees:Time to question the elephant in the room

There has been a lot of heated debate surrounding the proposed banning of referral fees, and with the rising cost of motor insurance at the forefront of everyone’s mind it is little wonder why. The subject has evoked strong emotions within the trade, in parliament and amongst consumers. So why should fleet managers care about the debate surrounding referral fees, and what must be done to ensure their business is prepared for upcoming changes?

The public debate

Before we look at the impact on fleets and the possible solutions, and the alternatives now being considered, it is worth investigating what has been generating this debate, particularly amongst politicians and the general public. Referral fees are widely associated with excessive and disproportionate legal costs in injury claims. The fiery public outrage is being fuelled by stories of profiteering by claims management companies (CMCs) and others selling injury claims to no-win no-fee solicitors. The widespread belief seems to be that this is driving up the cost of claims and therefore driving insurance premiums through the roof. 

In fact the truth is slightly more complex. It is certainly true that the trade in referral fees has encouraged CMCs and others to persuade people to make claims, and that this has almost certainly led to an increase in exaggerated and fraudulent claims. This is an example of referral fees at their worst and those profiteering in this way need to be driven out of the market. 

On the other hand most solicitors’ fees are fixed and are not increased by high referral fees. So the real need is to reduce the level of fees that solicitors can charge. This has now been recognised by the government and we must wait and see where the level ends up. Wherever it does, it is likely to be lower than it is at present, which means that there will be less money in the pot to pay referral fees. This could create enough downward pressure on the level of referral fees paid and could actually take the heat out of the debate and make it less profitable for CMCs and others to stay in the market. Indeed there is already some evidence of retraction in CMC activity – clearly those who have seen the writing on the wall – and this is welcomed.

What this means for fleets and brokers

A number of fleets, fleet management companies and brokers have relied for some time on revenues from referral fees, either directly or indirectly. There will almost certainly be a significant reduction in these revenues following any legislation restricting the levels of solicitors’ fees or referral fees. Some see a solution in Alternative Business Structures (ABS) under the new Legal Services Act. The Act allows ownership of law firms for the first time by non-lawyers. The basic theory is that if a referral fee can’t be earned, then a share in the profits of the law firm that handles the claim is just as good. However, as we have seen, the level of fees solicitors can recover is likely to be significantly reduced – so this is unlikely to be the attractive solution it was once thought to be.

Also, the politicians have spotted the profit share move and are looking at how this loophole may be removed. In addition ABSs are complex businesses to set up. Given these complexities and reduced profit levels, how attractive is it really for brokers/fleets to get involved in running a law firm? 

A solution from within?

It may be necessary for commercial brokers to find solutions for their fleet clients through a different approach. The smarter way may be to look at how claims costs can be minimised, not maximised. This brings cost savings on two fronts: reduced claims costs and lower insurance premiums. 

Fleets and brokers have substantial unused ‘claims capital’. They are the source of vast numbers of fault and non-fault claims. This gives them an opportunity to intervene to find ways of reducing costs, thereby creating a valuable asset that can be used in renewal negotiations with insurers. Improvements in claims also has a major side effect of improving efficiencies in operations, being better for customers and also helping to bring motor premiums down in the wider market.

Some brokers and fleet managers have already spotted this and are turning their back on referral fees in favour or more pro-active intervention and the use of mediation and non-credit hire solutions to reduce claims costs. This may well be the angle that the more tuned-in fleet owners may want to explore.

Peter Ashdown-Barr is Founder Director of InterResolve and is regularly consulted by brokers and others on innovative solutions surrounding claims issues.

Credit Hire and third party vehicle repairs

While the Transport Select Committee has been expressing its outrage at referral fees and spurious injury claims, another Government body has been carrying out a parallel investigation into another area of the insurance market.

As a result of its study, the Office of Fair Trading ‘has reasonable grounds for suspecting that there are features of the UK’s motor insurance market that restrict and distort competition relating to the provision of third party vehicle repairs and credit hire replacement vehicles to claimants’.

There are two areas of key concern. Firstly, the insurance company responsible for meeting a third party claim for a credit hire replacement vehicle and/or vehicle repairs appears to have only limited control over the choice of provider and also finds it difficult to assess the extent to which costs claimed are reasonable.

Secondly, the rival insurance companies (and brokers and credit hire providers) have an incentive to carry out practices which allow them to generate revenues through referral fees, while simultaneously inflating the costs that the third party insurer has to meet.

The OFT says that in 2010, the average cost to insurers of replacement cars from specialist companies was between £1,200 and £1,500. But the OFT claims a more realistic cost should be in the region of £400 to £600 if insurers had arranged like-for-like replacement cars themselves.

The OFT’s senior director of services, infrastructure and public markets, Sonya Branch, said: ‘ Our concerns relate to the provision of third party vehicle repairs and credit hire replacement vehicles to claimants, where we suspect companies may be competing to extract money from each other rather than keeping premiums as low as possible.

‘By carrying out this study, we aim to clarify whether a market investigation reference to the Competition Commission is appropriate.’

How to avoid rising costs

As in other areas of the fleet industry, telematics is playing its part in providing data which can reduce costs through the use of in-car monitoring devices.

The AA is the latest company to launch black box technology through its Drivesafe product to monitor driver behaviour and assess insurance premiums based on specific driver data, rather than the more vague system of vehicle type, driver age and location.

The AA is not alone; other providers of in-car insurance telematics include Cobra UK, TomTom Fair Pay Insurance, Insurethebox, MyDrive Solutions and Co-Operative Smartbox.

All offer insurance premiums based on driver performance, generally through a points-based system whereby speeding and hard cornering lose points whereas safe, economical driving gain points.

Cobra UK managing director Andrew Smith, believes telematics-based insurance could be at the heart of fleet insurance industry reform. He said: ‘ Simply changing the focus from car-based to driver-based insurance will not only be an effective way for fleets to reduce costs, but improve driver safety.’ 

Using data from your accident management provider can also increase your bargaining power when renewing insurance cover. 

Alphabet Accident Management says its monitoring of claims typically result in a 40-50% reduction in third party claims costs. Alphabet COO Matt Sutherland said: ‘68% of the fleets that were independently surveyed for the Alphabet Fleet Report said their insurance costs did not rise last year. That is a striking testament to the benefit of managing accident costs effectively.’ 

Total Accident Management’s operations director, Amanda Mullans, agrees, saying that the information generated through managing accidents can provide benchmark data by which fleets can identify areas of concern through exception reporting.

The BVRLA is also using the data its members generate to try and reduce insurance costs – a pressing concern for its self-drive rental members, some of whom have seen premiums nearly double (some have even been refused cover). The association has set up an insurance taskforce, meeting with the ABI and insurers and brokers, and aims to increase co-operation (the BVRLA’s RISC database contains the names of more than 7,000 individuals and companies who have caused problems for members) and producing best practice information for members on how they can reduce their risk profile.

BVRLA chief executive John Lewis said: ‘By getting a better understanding of the market, we hope to come up with some ways of improving the supply of self-drive hire insurance and lowering premiums. As an industry, we cannot just sit by and watch rental companies struggle because they can’t find or afford insurance.’ 

Finally, there are two simple ways of reducing costs: training your drivers to be proactive behind the wheel and take measures to reduce the risk of being involved in an accident is one way, and IAM Drive & Survive has put together a checklist which will help drivers avoid whiplash injuries (drivingadvice.org.uk).

Finally, read the small print of your insurance policy. Contained within it is a box you can tick which will prevent your insurer referring your case on to claims management companies or personal injury lawyers.