Fees From 'Bloodthirsty' Lawyers Return to Haunt U.K. Insurers
By Kevin Crowley
November 26, 2009
Nov. 26 (Bloomberg) -- U.K. 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.
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 pounds. 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 percent to the cost of car insurance, or about 82 pounds ($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 pounds 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 pounds a year, according to Axa.
Royal Bank of Scotland Group Plc, the U.K.'s biggest car insurer through its Direct Line and Churchill brands, said claims costs grew 21 percent to 941 million pounds 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 Nov. 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.
'Part of Industry'
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 U.K. The average car-insurance premium rose 5.6 percent to 821 pounds for an annual comprehensive policy in the three months to Sept. 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.
'Everyone Does It'
Insurers, motor garages and brokers can earn up to 400 pounds 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 pounds, Axa's Williams said.
Aviva, Admiral and Fortis said they accepted such payments. RBS, RSA Group Plc and Zurich Financial Services AG declined to comment. Axa said it doesn't receive referral fees.
"Everyone else is doing it so you're almost forced to go down that route to ensure the premiums you quote are as good as what everyone else is able to offer," said Richard Ellis, Aviva's head of motor and personal injury claims.
The Ministry of Justice is planning a new compensation process, to be implemented next April, for all claims under 10,000 pounds that will fix lawyers' fees and speed up payouts from insurers. Heskins of the Law Society said the system will apply to 80 percent of motor claims.
"We recognize that the whole system of compensation isn't working as it should," said Malcolm Tarling, a spokesman for the ABI. "There are practices like referral fees that insurers will have to take a good hard long look at," if the market is to be reformed, he said.
The accusation that referrals boost the cost of insurance is "a nonsense," according to Baker of the AMA, which represents the car-hire industry. "Hire tends to be used as an argument for insurers to justify higher premiums," he said.
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