The Office of Fair Trading is referring the motor insurance industry to the Competition Commission. That investigation is likely to encompass: insurers, garages, lawyers and credit hire companies that lease out vehicles to drivers in the aftermath of accidents.
With insurer reportedly not making money on actual premiums for some time, and investment income dropping (a feature traditionally strongly implicated in premium hikes), insurers have cast around for alternative sources of income: referral fees from credit hire, claims managers and solicitors firms being examples. Those costs are shifted onto opposing insurers who, slowly or quickly, learn to do the same. In a process of not so creative destruction, the system is eating itself. Whilst some consumers find it easier to make certain types of claim and get things like replacement cars; all consumers premiums are affected and the legitimacy of the whole system begins to crumble.
The insurers seek to blame the credit hire companies and the credit hire companies seek to blame the insurers. The OFT reference can be read here. The complexity of the causes is acknowledged but the clear implication of para. 2.9 is that at the heart of the causes lies referral fees paid to insurers of no-fault drivers (some, it seems, even get a referral fee for paint sprayed on repaired cars). One has to raise big questions about the role of the ABI in this process. They have sponsored a narrative of compensation culture for many years; captured both the politicians and the mainstream media in the process – and yet their members are a significant part of the problem. If the OFT analysis is correct it appears those members are driving the main problems.
There may yet be a claim that referral fees are a necessary evil; the best approach to regulating the failings of insurance companies. Both lawyers and credit hire companies make similar points. The argument is that referral fees are necessary to ensure insurance companies to encourage policy holders to make claims when they are not at fault in accidents. It’s an interesting argument. Essentially, the claim is insurance companies do not properly look after their customer and referral fees incentivise them to do it better. The question is whether there is a better and cheaper way of getting the insurance companies to behave appropriately. It should be noted that OFT has now put a price on that – through increased credit hire costs for example. If their estimate is right, up to £225m could be spent to improve thing if inflated costs can be similarly reduced. Life is never that simple but it is an indication both that things have gone badly wrong and that there is considerable room for better regulation of the insurance industry which would reduce costs, benefit consumers and – crucially – better protect the public interest. The idea that the process drives spurious claims, something which should be properly and independently investigated by a body more disinterested than the ABI, could also finally be properly tested.
And if it sounds familiar it is because it is familiar. One line taken on the banking scandals is that ‘inability’ to charge for current accounts incentivises Banks to miss-sell to their consumer and to build self-serving complexity into the system. Only now is that miss-selling being seen for what it probably is: industrial, institutionalised fraud. It is an (apparently) widespread corruption of ethics in corporate life. We do not yet know if things are as bad in insurance but they may be. Insurers claim they cannot charge profitable premiums so increase those premiums through the backdoor then complain about the costs the process generates. Through the economic incentives they offer, they implicate others, including lawyers, and they have been signally successful in organising and managing the shifting of blame. They are not the only cause, all participants are trapped to a degree by the logic of the market, but they appear to have the biggest questions to answer. And they have committed the cardinal sin of minimising their own role in the process by shifting the blame elsewhere.