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:
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
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 neutralthere 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.