Following Lord Justice Jackson's review of civil litigation there have been widespread calls to ban the payment of referral fees by claims management companies and legal firms. These organisations that act for non-fault claimants can earn significant revenues, particularly from success fees for personal injury claims, and it is the need to secure the customer that has driven the use of referral fees. Customers were originally attracted to claims management organisations because the insurance industry was failing to meet their needs, and it is this failure that created an opportunity for these organisations to position themselves as acting on the customer's behalf.
The growth of the claims management industry has had a frightening impact on the insurance sector. For personal injury claims lodged in 2002 the insurance industry paid out £7 billion in compensation. The cost of personal injury claims lodged seven years later, in 2009, is estimated at £14 billion, despite the actual number of claims falling during this period. Additionally the Association of British Insurers estimates that for every £100 paid in compensation a further £87 is paid in legal costs. Looked at it in this light, the claims management industry should be redundant - it merely imposes extra cost (conservatively being estimated at £2.7 million per day) on insurance companies and, ultimately, on customers through higher premiums of 30% to 40%.
To bring about a sustainable reduction in premium inflation, the insurance industry needs to tackle the demand among customers for claims management services. It can do so by taking the following steps:
Acknowledge why claims managers have found a role
Insurers' poor treatment of customers, including their reluctance to fairly settle bona fide claims and their tendency to offer low settlements, has allowed the claims management industry to flourish. Customers are, as a result, distrustful of insurers and are receptive to intervention by independent 'professional' third parties to fight their claims. Insurers must explicitly acknowledge that they have failed customers before they can go on to take the concrete steps that will be needed to regain customers’ trust and reduce their demand for the services of the claims management industry.
Adopt a fairer approach to claims settlement
The insurance industry needs to adopt a new approach to settling claims. This should include identifying and acknowledging genuine claims quickly and developing far more transparent guidelines on the appropriate level of compensation that claimants are entitled to for particular types of injury or disablement. Opinions among industry experts suggest that the small number of insurers who already do this have a consistently better long term underwriting result. Such clarity across the industry, together with rapid assessment and settlement, would mean customers would not be better off using a claims management company.
Offer affordable and effective legal cover
There will always be cases where customers require comprehensive and professional legal support. Insurers have an opportunity to provide a value-for-money legal expenses product, at more attractive premium levels, to meet the needs of customers who may one day require legal support. Currently, the legal expenses cover offered when insurance policies are sold is too expensive and poorly understood. On cost, the breakdown of a typical legal expenses policy shows that claims paid to customers average £1 while policies are sold for upwards of £20. Insurers should offer reasonably priced cover and educate consumers on the suitability and benefits of buying this type of product. Otherwise, the insurance industry will continue to incur the unnecessary costs that arise when customers turn to the claims management industry for help in pursuing their claims.
To find out more about how PA’s insurance team can help your organisation adopt your approach to settle claims please contact us now.