The cost of motor insurance - Transport Committee Contents

2  Personal injury claims and referral fees

14. In summarising its reasons for the recent increase in the cost of motor insurance, the British Insurance Brokers' Association (BIBA) put:

the increase in the propensity to claim, the increase in the amounts awarded, the impact of claims management companies and the increases in the number of whiplash claims.

at the top of the list. [30] The AA told us that "the effect of increasing numbers and costs of personal injury claims has increased insurers' costs by at least 30% per annum" in recent years.[31] Most other witnesses identified personal injury claims as one of, if not the, main driver of higher premiums.[32]

Table 1: Number of motor insurance injury claims notified to the Compensation Recovery Unit
2000-05 average

15. Table 1 shows that the number of personal injury claims relating to motor accidents increased by over 70% in the latter half of the last decade.[33] The number of personal injury claims now far outstrips the number of accidents: several people, including both drivers and both sets of passengers, can make claims in relation to a single accident but it is unsurprising from these figures that concerns have been expressed about the scale of fraud in this area.

16. Around 70% of motor insurance personal injury claims arise from whiplash injuries.[34] Witnesses were divided as to whether these were always genuine. RBS Insurance suggested that many whiplash claims were fraudulent[35] and Nick Starling of the Association of British Insurers argued that people were tempted to claim whiplash injuries because "it is a soft tissue injury. There is no physiological evidence, as I understand it, that you've got that injury".[36] A favourable comparison was drawn with Germany, where fewer claims for whiplash injuries are allowed by the courts.[37] David Powell of the Lloyd's Market Association explained why it was difficult for insurance firms to challenge claims, given that they were based on a doctor's certificate.[38] However, John Spencer of the Motor Accident Solicitors Society (MASS) contested "the inference that a whiplash injury is not an injury".[39]

17. Several witnesses said that the average amount awarded to personal injury claimants was increasing rapidly: the ABI suggested that average awards were increasing by 20% per annum.[40] Our attention was also drawn to the very high awards made in relation to severe injuries, particularly to young people.[41] The Association of Personal Injury Lawyers (APIL) cautioned against measures which would cap or reduce awards, arguing that awards in the UK were "too low in any event".[42] The ABI disagreed with this view and cautioned against a reduction in the discount rate applied to lump-sum payments which could lead to higher payouts.[43]

Why has the number of personal injury claims increased?

18. Mark Boleat and the Claims Standards Council attributed the rise in the number of personal injury claims to the introduction of conditional fee arrangements (otherwise known as 'no win, no fee') and a number of subsequent reforms.[44] These changes would appear to account for the significant and continuing growth in the number of claims. The Claims Standards Council said that the introduction of conditional fee arrangements had led to the establishment of claims management firms, which "promoted themselves to consumers offering advice to people wishing to make a claim and referring them on to a solicitor".[45]

19. We heard criticism of claims management firms for generating personal injury claims, particularly as a result of "aggressive" marketing techniques.[46] David Brown of the Institute and Faculty of Actuaries said that there were specific parts of the country, particularly north west England, Yorkshire and the north east, where claims management firms are particularly active and have generated "at least half" of the total number of claims in those areas.[47] He observed that personal injury claims were significantly lower in Scotland, where claims management companies do not operate because of differences in the legal regime.[48]

20. Mark Boleat defended claims management firms, arguing that they had "contributed to access to justice" and that enabling people to claim compensation for injuries they had suffered was no bad thing.[49] The Claims Standards Council said that there were "only very small pockets of abuse" in the sector following the introduction of self-regulation in 2006. It pointed out that "every part of the sector operates claims management activity" including law firms and "insurance brokers using telesales services to secure personal injury clients".[50] National Accident Helpline "strongly oppose[d] the view that the main cause of the increase in personal injury claims from 2005-10 is advertising of claims management companies and TV advertising".[51]

21. The possibility of incurring legal costs will have dissuaded some people injured in motor accidents before conditional fee arrangements were brought in from claiming compensation for their injuries. The provision of wider access to justice is to be welcomed, but it has come at a cost. Motor insurance premiums must now pay for compensation for personal injuries and legal costs on a far greater scale than before.

22. Lord Justice Jackson's review of civil litigation funding and costs recommended that conditional fee arrangement success fees should no longer be recoverable from the losing party in any case. The Government is currently consulting on this proposal.[52] This issue has ramifications which extend well beyond the scope of this Report. In our view, the Government should ensure that arrangements exist to enable people injured in a motor accident to claim compensation, regardless of their income. However, wider access to justice should not provide an opportunity for people to make fraudulent claims for compensation for non-existent or pre-existing aches and pains. We return to this issue below.

Legal costs and referral fees

23. According to the ABI, some 10% of motor insurance premiums pay for the legal costs associated with personal injury claims and the average legal cost associated with a claim (£2,100) is almost as great as the average amount paid to the claimant (£2,430).[53] It complained of "disproportionate fees"[54] but this was disputed by MASS which said that insurers were involved in agreeing the legal costs' regime in 2003 and 2010.[55] In oral evidence, Mr Spencer argued that the average legal cost per claim had decreased in recent years.[56] APIL cited evidence that "legal costs as a percentage of total payouts by insurers have remained constant at 30 per cent for many years".[57] A web-based portal for processing smaller claims of under £10,000 was introduced in 2010: witnesses could not agree on whether or not it had yet proved beneficial in reducing costs.[58] The ABI said it was encouraging claimants "to go direct to the company insuring the driver who caused the accident and get [their] redress through them" but this practice was not supported by APIL, who feared that claimants might be "under-compensated",[59] or National Accident Helpline, which suggested that this practice had led to an increase in claims.[60]

24. Over 40% of personal injury lawyers pay referral fees to receive work from insurers or claims management firms.[61] Fees range on average from £200 to £1,000 per referral and there can be several referrals in relation to a single insurance claim.[62] Fees may be paid and received by insurance firms, vehicle repairers, rescue truck drivers, credit hire firms,[63] claims and accident management firms, law firms and medical experts.[64] sent us evidence that some police forces charge fees for collecting vehicles which are unfit to drive following an accident.[65] ABP Club, which represents vehicle repairers said "innocent policyholders are often 'encouraged' by their own insurer to pursue a claim as their insurer will gain financially from this in the form of a referral fee from the lawyer they pass the case to." It referred to this practice as a "great merry-go-round with each insurer gaining at the cost of another insurer".[66] Insurers Aviva said that solicitors' marketing costs, including referral fees, can now total as much as 40% of their base costs, which are reclaimable under conditional fee arrangements.[67] John Spencer of MASS said "there are large amounts of insurance company income deriving from the very referral fees that are complained about".[68]

25. Mark Boleat argued strongly that referral fees were a form of marketing cost and did not add to overall costs in the insurance industry.[69] APIL said "there are no circumstances of which we are aware which would result in referral fees generating an increase in insurance premiums".[70]

26. Referral fees are another aspect of the Jackson review of litigation costs: he recommended abolition or capping.[71] Witnesses were divided over what to do about referral fees, some agreeing with Jackson, at least in part,[72] and others arguing that he had got it completely wrong.[73] Laurence Beck of the Claims Standards Council said "some of the intentions [of the Jackson recommendations] are very good but I think most of the good that will come out of Jackson happens already to be in place".[74] It was suggested that if referral fees were outlawed claims management firms would buy up solicitors' practices.[75]

27. The Legal Services Board's study of referral fees thoroughly examined the case for and against the payment of such fees by solicitors, including the impact on costs and the independence of legal advice. It accepted the view of its consumer panel that there was not sufficient detriment to consumers to merit a ban on such fees but there were concerns about transparency.[76] The panel concluded that transparency "alerts consumers to the possibility of conflict, counters pressure selling, encourages consumers to compare prices to find the best deal and helps regulators to monitor the market".[77]

28. In our view, consumers are largely unaware of how much money moves around the insurance industry when they make a claim, particularly if they were not at fault for the accident. We suspect consumers are often confused about why their insurer insists that they use a specific vehicle repairer or solicitor and about whether they are entitled to make their own choice. The Legal Services Board has made recommendations about the transparency of referral fee arrangements in the legal sector which we consider should form the basis for a transparency regime throughout the motor insurance market. Insurers should publish on their websites a list of the firms with which they have referral arrangements, an indication of the level of the fees paid, and a clear explanation of how referral arrangements work and their purpose. Policy holders should be sent this information with their insurance documents. When claims are made, insurers should make it clear to claimants that they need not use the solicitor, vehicle repairer or credit hire firm which is recommended by the insurer. We look to the insurance industry to implement a more transparent regime for referral fees by the end of next year and to the Government to step in, with legislation if necessary, if the industry is unwilling or unable to agree on this.

Bolder reform?

29. Witnesses mentioned the different approaches to dealing with personal injury claims arising from motor accidents in Scotland and Germany, which have different legal jurisdictions.[78] In some jurisdictions, including in certain parts of Canada, motor insurance is provided on a 'no fault' basis, whereby each party claims against their own insurer for their own losses irrespective of who was responsible for the accident which led to the claim. There is evidence that switching to no fault insurance can reduce personal injury claims and, therefore, premiums.[79] We put this suggestion to the Department which described it as "interesting" but said "it is always difficult to compare legal systems in different jurisdictions".[80]

30. Another issue we explored was whether it would be preferable for drivers, rather than vehicles, to be insured. This would prevent 'fronting', for example. The Minister said "that is a lot easier said than done" and would require legislative change. He pointed out that some firms were now offering family policies, with named drivers keeping separate no claims discounts.[81] We also received evidence arguing for motorists to be held more strictly liable for injuries caused to cyclists and pedestrians.[82]

31. It would seem that a number of countries have taken steps to restrain the number of personal injury claims in relation to motor insurance, for example by changing the nature of the insurance system or making other legal adjustments. Although we accept the Minister's point that not all of these changes will be applicable to the UK, because of differing legal regimes,[83] we would be surprised if the UK had nothing to learn from international experience. We recommend that the Department sponsor a research project on international experience in restraining the number of personal injury claims relating to motor insurance, with the aim of publishing a discussion paper on this issue during 2012 outlining possible options for change.

30   Ev 72 paragraph 4.2. Back

31   Ev 62 paragraph 2.4.6 and also see Ev 43 paragraph 6, Ev 44 section 2 and Q35. Back

32   For example Qq92,174,Ev 43 paragraph 6, Ev 57 paragraph 6.1, and Ev w8. But see Qq 232-34 for a different perspective. Back

33   Insurers and other compensation providers are required to provide details of personal injury claims to the Department for Work and Pensions' Compensation Recovery Unit. See Ev w28, paragraph 12 and Richard Lewis, Annette Morris and Ken Oliphant, Tort personal injury claims statistics: Is there a compensation culture in the United Kingdom?,(2006) 14 Torts Law Journal, pp158-75. Back

34   Ev 52 paragraph 3.14. Back

35   Ev w20. Back

36   Q100. Back

37   Ev 64 paragraph 5.3.3, Ev w19 paragraph 24, Qq 16, 106. Back

38   Q180 and Ev w35 paragraph 4.2.1. Back

39   Q111. Back

40   Ev 51 paragraph 3.4 and Ev 69 paragraph 2.2. Back

41   Ev 74 and Ev w14. Back

42   Ev 83 paragraph 20. Back

43   Ev 53-54. Back

44   Q122, Ev 86-87 and annex C to the appendix to the memorandum from the Institute and Faculty of Actuaries, which is available in the Parliamentary Archives. Back

45   Ev 86. Back

46   Ev 43 paragraph 8, Ev 50 paragraph 2.5, Ev 61 paragraph 2.4.1, Ev 69 paragraph 2.3, Ev w11, Ev w17-19 paragraphs 8 and 19 and Ev w36 section 5. Back

47   Q14, Ev w18 paragraph 12 and Ev w35 paragraph 4.2.1. Back

48   Q15. Back

49   Ev 83 paragraph 4; see also Ev 87 and Qq 177 and 240. Back

50   Ev 87. Back

51   Ev w28 paragraph 11. Back

52   Government Response to Jackson, section 2.1. Back

53   Ev 50-51 paragraphs 2.4, 3.7. Saga said that legal costs accounted for 20% of premiums, see Ev w18 paragraph 17. Also see Ev 47-48 paragraphs 2.14 and 2.17 and Q12. Back

54   Ev 50-51 paragraphs 2.4, 3.7. Back

55   Q96. Back

56   Q97. Back

57   Ev 81 paragraph 6. Back

58   Qq107, 231, Ev 72 paragraph 3.13, Ev 82 paragraph 11, Ev 88 and Ev w10. Back

59   Ev 81 paragraph 8. Back

60   Ev w28 paragraph 18. Back

61   Referral Arrangements, Legal Services Consumer Panel, May 2010 (hereafter LSCP) p13. Back

62   Ibid, para 1.3 and p14 andsee Qq217 and 219. Back

63   which supply drivers with a replacement vehicle. Back

64   LSCP p15. Back

65   Ev w35 section 4.1. Back

66   also see Ev 45, 47 on the credit hire market, paragraphs 1.5 and 2.8 to 2.12. Back

67   Ev w24-25 paragraph 1.2. Back

68   Qq 98, 117. Back

69   Qq 148-154 and Ev 83 paragraphs 4 and 5. Back

70   Ev 82 paragraph 13 and Qq 225-26, 230. Back

71   Review of Civil Litigation Costs: Final Reports, Lord Justice Jackson, Dec 09, chapter 20. Back

72   Q179, Ev 46 paragraph 1.6, Ev 72 paragraph 3.13, Ev w10-11 and Ev w31-32 section 10. Back

73   Ev 83 paragraphs 19-20, Ev 88, Qq 191, 252-53. Back

74   Q256. Back

75   Q105. Back

76   LSCP, chapter 9. Back

77   LSCP, paragraph 8.23. Back

78   Ev 45 section 4 and annex E to the appendix to the memorandum from the Institute and Faculty of Actuaries, which is available in the Parliamentary Archives and Ev w19 paragraph 24. Premiums are capped in some jurisdictions, see for example "The Impact of Rate Regulation on Claims Evidence from Massachussets, Automobiles Insurance", R. A. Dering and S. Tennnyson, Casualty Actuarial Society, 2008 Discussion Paper Program. Back

79   "The Influence of Motor Vehicle Legislation on Injury Claim Incidence", M. Lemstra and W. P. Olszynski, Canadian Journal of Public Health, Jan - Feb 2005, Vol. 96, No. 1, pp65-68. Back

80   Ev 88 and Q217. The Royal Commission on Civil Liabilities and Compensation for Personal Injury recommended in 1978 a switch to a no fault compensation scheme for people injured in road accidents funded by increased petrol duty, but its recommendations were not accepted by the Government - Command 7054 and the then Prime Minister's statement to the House, 14 March 1978. Back

81   Q270. Back

82   Ev w37-39 paragraphs 11-29 and Ev w39-40. Back

83   Q273. Back

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