Cost of motor insurance: follow up - Transport Committee Contents

Written evidence from Ai Claims Solutions (UK) Ltd


The Transport Select Committee is due to hear evidence from a number of bodies, including Jack Straw MP, during its re-opened Inquiry into Motor Insurance. Ai Claims Solutions is concerned to ensure members of the Committee are given the opportunity to hear evidence from both sides of the motor clams argument, especially where referral fees and reform of industry practices are concerned.


Justice Minister Jonathan Djanogly MP has announced that the Government is to bring forward legislation to ban referral fees for personal injury cases. In a Written Ministerial Statement, the Minister said:

"Our aim is to reform the system to end the abuses that have occurred while ensuring that victims who have suffered a personal injury through someone else's negligence remain able to make a claim for damages where they have an appropriate case. Alongside the planned reforms to conditional fee agreements, the ban on referral fees will contribute to the Government's plans to tackle the compensation culture by discouraging unmeritorious claims and controlling the disproportionate costs of personal injury claims, without denying access to justice."

There is no official statement on when the Government is likely to introduce legislation, nor any clear sense of the scope of the reforms. In media interviews, the Minister inferred that legislation may be introduced in the Spring of next year.


1.  A ban on PI referral fees will not resolve dysfunctional market

Despite the Government's intention to row back against the compensation culture, Ai do not believe a ban will have the effect ministers believe.

—  A ban will drive more public marketing and advertising from solicitors.

—  Solicitors will still pay money to pick up potential clients, but the practice will go underground.

—  Solicitors will change they way they attract referrals by switching to payment through "marketing". It is hard to see how legislation can counteract this, even if the practice is criminalised.

—  A ban would not create fairer treatment for customers and no reduction in the cost of claims.

—  A ban would not stop insurance fraud.

—  Referral fees are not a major factor behind the rise in motor premiums; if they were banned, premiums would continue to rise.

2.  The effect of ABS (Tesco Law)

The genesis of alternative business structures (Tesco Law) is already creating changes in market practice. Government should monitor these changes before taking precipitate action.

Insurers (even those who have already said they'll ban referral fees) are setting up law firms to generate new revenue streams from claims management. Customers in an accident will be referred to the insurer's own law firm. Although more transparent, customers won't have the freedom to choose their own provider, as they will come under pressure to use the law firm specified by the insurer.

Claims for whiplash have risen in recent years—but the science behind whiplash has barely advanced.

—  Lack of investment from NHS into whiplash—£8 million last year versus £2 billion paid out.

—  We need to explore how other legal systems deal with whiplash and seek new ways to manage this type of injury.

—  The ABI's own statistics are flawed and unreliable.

—  A large proportion of the ABI membership do not want a ban on referral fees.

The insurance industry is divided on the issue of referral fees, which in any event are a small issue in context of other industry practices.

Examples include:

—  Insurers profiting from vehicle repairs.

—  Insurers selling data to data mining businesses.

—  Insurers misselling legal expenses insurance.

—  The growing incidence of fraud.

—  Insurers poor claims management practices which delay settling claims.

If Government was serious about reducing the costs of motor insurance, there are more appropriate targets and approaches than referral fees.

Ai is unconvinced that the Government has fully thought through the implications of a ban, given the lack of detail in the Minister's statement about the scope of the legislation.

Our sense is that the decision seems to have been made in response to pressure from campaigners, as the Ministerial statement contains little evidence/facts to justify the ban. Ministers must clarify the benefits in clear and monetary terms so that the industry can see the positive effects of a ban.


1.  What the real figures are to drive the decision to legislate? How many PI claims have been made and what is the total solicitors cost? What is the total paid out in compensation?

2.  By banning, how much "income" that goes back into the system to insurers would be lost—how would insurers make up the shortfall? There are no clear figures on how much whiplash actually adds to a premium? The ABI says 87% but is this figure before or after insurers take their income?

3.  The Government's announcement has come before the impact of alternative business systems (ie Tesco Law) is in place. This will bring about significant market changes, in particular, policyholders being channelled into insurer-owned legal firms rather than being given a free choice.

4.  There are many other issues which need resolution as well as referral fees (a ban on its own won't have much impact). Ministers need to consider regulating insurer profits from repairs, mis-selling Legal Expenses.

September 2011

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