Cost of motor insurance: follow up - Transport Committee Contents

Written evidence from Admiral Group plc

Admiral Group plc is a company based in Cardiff, South Wales, with offices in Newport, Swansea; Bangalore, India and Halifax, Canada servicing UK customers. It currently employs over 4,500 people in the UK. It also has small businesses in Spain, France, Italy and the USA.


Referral fees are a symptom of the dysfunctionality of the current system not the cause.

The dysfunctionality of the current situation is driven by two elements of the system:

—  the fact that lawyers are paid £1,200 to handle a small BI claim that only costs them a fraction of that amount to process; and

—  the fact that a relatively minor undiagnosable condition that can't be disproven, namely whiplash, generates compensation payments of £1,000-£2,000 and so creates a huge temptation to many people to exaggerate or misrepresent their symptoms.

Referral fees are a result of the resulting scramble to capture the high profit margin available to lawyers on whiplash claims. If referral fees were to be banned then the cost of any individual claim would not fall, it would instead shift the "profit" from the referrers to the lawyers.

Referral fees do, however, increase the number of whiplash claims by funding activities that increase the number of whiplash claims (eg repeat phone calls to potential claimants to persuade them they have "whiplash").

If referral fees were banned without any other action taken the net effect on car insurance premiums is hard to estimate accurately but is likely to be pretty neutral—there would be a reduction in the number of whiplash claims made but there would also be an end to the referral fee income to insurers and brokers on all whiplash claims which currently helps pay the costs of operating in the largely unprofitable UK car insurance market.


Admiral is supportive on the banning of referral fees, but believes in order to make recommendations work, the following need to be considered:

1.  Reduce the level of legal costs included in the settlement of bodily injury claims. Legal costs receivable by claimant lawyers on car insurance claims materially exceed the actual processing costs incurred. Because of this excess profit, lawyers spend large sums of money trying to capture a bigger share of such claims, through referral fees (> £800 per case) and direct advertising. This activity stimulates extra claims. A reduction in legal costs would thus both cut the average cost and the number of bodily injury claims.

2.  Reduce the level of compensation for pain and suffering in relation to the whiplash claims. Whiplash is an undiagnosable condition. If a motorist asserts that they have whiplash, it is nearly impossible to disprove this assertion. Because of this, the majority of motor insurance fraud is centred on bogus whiplash claims. The right level of compensation for the discomfort associated with whiplash is a subjective decision, but the actual pay-outs at £1,000+ represent a significant proportion (circa 25%) of bodily injury pay-outs. A material reduction in the compensation awarded for whiplash would reduce car insurance premiums and reduce fraud.

3.  Place restrictions on young drivers. The ABI have made a number of suggestions which would, if implemented, materially cut car insurance premiums for younger drivers at the cost of some restrictions for recently-qualified younger drivers. Examples would include restrictions on night-time driving and driving with more than one passenger. Other countries have additional requirements in place for young drivers, an example of which would be a zero alcohol tolerance for individuals aged below 21.

October 2011

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Prepared 12 January 2012