A new report says a government crackdown on bogus injury claims may take years to filter through to lower motor premiums.
Government plans to reduce the amount of money wasted on bogus or inflated personal injury claims are unlikely to have an impact on the soaring cost of car insurance for several years, a new report warns.
A study by analyst Datamonitor has found that even if proposals to address the UK’s “compensation culture” are enforced, the amounts that motor insurers have to pay out to cover accident claims will continue to rise until 2014 at least.
The cost of these claims is thought to be one of the most important factors behind record increases in car-insurance premiums over recent years.
The Confused.com/Towers Watson Car Insurance Index found that the average cost of a comprehensive motor policy had soared by £220 to £835 in the 12 months to April 2011.
Industry experts estimate that accident-related legal fees now add at least £100 a year to each driver’s insurance bill.
But Datamonitor’s research showed that the costs faced by personal-injury insurers – the majority of which are related to motor policies – would still rise in the next few years, from £8.4 billion in 2010 to £9.7billion by 2014.
According to the experts quizzed by Datamonitor, this is because the changes being put forward by ministers will not do enough to drive down the fees charged by solicitors, which are inevitably passed on to insurers and their customers.
Proposals to cut injury costs
In his March Budget, Chancellor George Osborne announced he would implement the recommendations made in two reviews of Britain’s “compensation culture”, the first carried out by Lord Justice Jackson and the second by Lord Young.
The main problems identified were that individuals could bring claims for injury at very little cost, and that they were often induced to do so by adverts for no-win, no-fee solicitors.
Another issue was of referral fees, which are paid by solicitors to companies such as claims managers for putting them in touch with potential clients.
Ministers will now act to stop solicitors being able to recover their success fees from insurers, which will mean that compensation awards to claimants will be cut.
And there are likely to be restrictions imposed on the advertising carried out by claims management companies and lawyers.
However, there are no plans to limit the amounts that legal firms can charge their clients or defendants in personal-injury cases.
And it is not yet clear whether the coalition will take steps to ban referral fees (see below).
Why these changes won’t mean cheaper car insurance
Datamonitor spokeswoman Barbara Kubis-Labiak said: “The rising costs of motor personal injury claims were one of the key reasons for the review of civil litigation costs by Lord Justice Jackson.
“With the continued aggressive TV and marketing campaigns by solicitors and claims management companies, there has been a rise in disproportionate claims, with exaggerated claim sizes and unnecessary costs, making regulatory changes essential.”
But Ms Kubis-Labiak added that the changes that had been suggested were unlikely to improve matters in the short-term because they did not address the actual fees charged by solicitors.
“Although we believe that changes to regulations over the next few years will do something to tackle rising costs, this will only result in a marginal slowdown. In fact, after taking into consideration all of the expected changes, we have only revised our long-term forecast for the 2010–14 growth of claims costs down from 5.4 per cent to 3.7 per cent.
“Therefore costs will remain a problem and further changes will be needed to finally bring them under control.”
An end to referral fees?
The money paid by solicitors to claims-management companies – which often advertise their services on TV or by cold-calling – is currently under scrutiny, with the insurance industry calling for an outright ban in a bid to control costs and the number of cases brought.
But a recent report by the Legal Services Board said that these fees should be made transparent – so consumers knew how much was being paid and to whom – rather than outlawed.
Nick Starling from the Association of British Insurers responded: “We are disappointed but not surprised by the Legal Services Board’s decision that overwhelmingly favours lawyers. Making referral fees more transparent, as the report recommends, will not stem the growth in the compensation culture or frivolous and exaggerated claims which the practice encourages. This is why they should be banned.
“The Government’s much-needed proposals for civil justice to bring about a simpler, speedier and cost-effective compensation system for genuine claimants will only succeed if referral fees are banned. Insurers now look towards Parliament to take the necessary steps and ensure a full ban, which is the only way to protect consumers.”