Will the Referral Fee Ban Reduce Car Insurance Premiums?

An interesting story in the Law Gazette today (http://www.lawgazette.co.uk/news/admiral-reveals-referral-income) has led me to ponder whether the changes set to come in to force in April 2013 will actually have the opposite effect to what Parliament intended.

It seems that Admiral Insurance have published its half yearly financial report showing that the company earns £7 in referral fees for every vehicle it covers, which amounts to a total income of around £24.5m each year. So why is this significant?  Well, the Government is introducing wide-ranging changes to civil litigation, with particular emphasis on personal injury claims, and most of the changes will apply from April 2013.  The single aim of the changes is to make such claims cheaper and quicker, thereby reducing the cost to the insurance industry (the Government does not like it when insurance companies have to pay out, even though that is the point of insurance).  Reducing their outlay means that insurers can pass the savings on to the customer by bringing their astronomical car insurance premium’s down.  Everyone’s a winner.

Not so.  Many of the changes could potentially reduce the cost of civil litigation, but from April 2013 paying for personal injury work will be banned.  At present, insurers take the details of a new claim from their customer.  They have one or more panel Solicitors on their books.  The insurer will tell the customer that they must use their Solicitor under the terms of the insurance contract (which is actually wrong).  The customer gets passed on to a firm that they have never heard of who are often based at the opposite end of the country.  They will almost certainly never meet their Solicitor in person.  In return for passing details of the claim on to the nominated Solicitors the insurer will charge the firm a referral fee.  Although that will eat in to the firm’s profit for each case they are happy to accept such referrals on the basis that if they get a large volume of cases and conduct them cheaply they will still make a profit.

So insurers make money just by taking accident details from their own injured customer and selling them on.  In some cases the income derived from these referral fees amount to as much as half of the total revenue brought in by the insurer.  From April next year the insurer will no longer be able to charge for the referral and their income will drop by anything up to half.  You can reduce an insurer’s outlay if you like, but if you slash their income by a corresponding or greater amount, the insurer will be worse off.

If insurers face losing huge percentages of their income surely car insurance premiums will rise, not fall, in order to plug the hole?  That completley undermines all of the other Governmental changes which are aimed at reducing the cost.  Some insurers will invent innovative methods of still charging the fees through alternative methods but it certainly seems at present that the cost of car insurance is set to increase, despite claims from the insurance industry that they will not.

David Mayor

About David Mayor

David is Head of the Preston Office's Civil Litigation team and deals with all types of private Civil Court disputes. David’s blogs cover his expertise in all aspects of personal injury law from low value Road Traffic Accidents right through to complex large loss claims. David also writes and has a vast array of experience in Public Liability (trips and slips), Employer's Liability (accidents at work), and Motor Claims (motor vehicle accidents, pedestrian accidents).
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