The latest analysis shows that many insurers are under-estimating the way credit hire companies are eating into their margins. The trend has a long way to go unless the industry takes the initiative in what would amount to a cultural revolution, says Naeem Ali of EMB.
A senior insurance executive recently told a private meeting that credit hire organisations (CHOs) were “a monstrosity”. While that is a commonly held view, it has to be said that the monster is largely of the insurance industry’s own making.
There are two reasons why CHOs have grown rapidly into a business sector worth hundreds of millions, in which the biggest, Helphire, has made it into the FTSE 250. First, insurance companies created a vacuum by not offering innocent third parties the service to which, as a number of court cases have established, they were entitled. Then, when CHOs started to fill that vacuum, claims managers were only too happy to use their services: provided, of course, their own customers were not at fault and some other insurer would pick up the bill.
It is not my job to pass moral judgment on CHOs. You could argue that they are parasites or, alternatively, that they simply provide a necessary service. What is clear, though, is that the insurance industry has nurtured this beast and now has no control over its actions. It is learning to live with the consequences.
Just how big those consequences are can be seen from our analysis of insurers covering approximately two thirds of the UK Motor market. The data puts figures on what every claims manager already knows: that CHOs are becoming involved in an ever-growing number of cases and that, when they do, costs mushroom.
CHOs emerged in their modern form in 2001, and started to take off during 2002-3. Between 2002 and 2006 the involvement of accident management companies in Motor third party property claims rose from 7% of the total to around 20%. This pushed up the aggregate cost of this type of claim in 2006 by 12% adding approximately 1.5% to average loss ratios. Although we do not have the exact figures, we know that the numbers have continued to rise since then.
That, however, tells only part of the story. A valuable sideline for CHOs is the money they make from referral fees to personal injury lawyers. The overall impact of this is expected to be in the region of an additional 2% to 4% increase to average loss ratios. For the insurance market as a whole, the combined effect will be to wipe out the benefits of the increased premium levels that they managed to extract with great determination during 2007.
Our initial estimates suggest that Motor premiums rose by around 10% during 2007. Yet, despite this progress, the market’s loss ratio has not improved and has almost certainly deteriorated. In the past, we might have attributed such a disappointing outcome to the growing cost of personal injury, yet this type of claim has levelled off. The continuing underwriting deficit in the Motor market can be linked directly to the growing influence of CHOs.
Even that, though, by no means completes the picture. The data show that, in 2006, 80% of the population did not use accident management companies when they could have done so, but the proportion is shrinking daily as people become more knowledgeable and street-wise.
There is no doubt that the upward trend has continued to gain momentum, and why not? Who would refuse the offer of a gold-plated service complete with a like-for-like replacement vehicle (in reality often a newer and better version than the one that has been damaged)? Why accept a three-door bottom-of-the range hatchback when you can have something grander at no cost?
At the moment, although they would not necessarily see it that way, insurers are getting off quite lightly. As our research shows, however, the public are becoming rapidly more aware of the rights and how to pursue them. The extensive advertising of CHOs is having an impact on raising awareness, but it is not the only or even the main driver of this trend.
Word of mouth is probably the prime influence. Motor accidents are a big talking point. Sooner or later the victim (or spouse or partner) will speak to someone who has used, or knows someone else who has benefited from, an accident management company. Word gets around.
Insurers and brokers also continue to be an important source of business for CHOs. Again it is worth observing that, although they may criticise them, insurance companies are often only too happy to use these companies when it does not cost them to do so.
This leads to an interesting question: what happens when both parties involved in a crash are insured by the same company? Does the claims manager handling the innocent third party pass the incident direct to his or her colleague who is looking after the policyholder liable for the accident? This would be the most sensible and cost-effective course of action.
Or does he or she sometimes involve a CHO, so putting up the cost unnecessarily? We have yet to reach a definitive answer, but there is a strong suspicion that this self-inflicted wound happens more often than people might realise.
The fourth major group to promote CHOs are others involved in providing services to the innocent third party, frequently the breakdown people. They are often first on the scene and it is only natural that the car owner should seek their advice. They may have the contact details of a suitable CHO. Hence, even before the liable insurance company is aware of the accident, events are out of their control.
So, where does this leave insurers? We are talking about a genie that really cannot be put back in the bottle. Accident management companies are here to stay, they have the law on their side, they are popular with the public and they are supported by an increasingly robust and sophisticated infrastructure. Their use is on the increase and it would be surprising, on current trends, if it did not become the norm by the middle of the next decade, with inevitable consequences for loss ratios.
The first thing that should be done, therefore, is to build these and likely future developments into pricing and reserving levels. In our experience this often does not happen enough. Underwriters and claims managers alike are caught by surprise. This fact helps to explain why, despite failing to achieve a technical profit in 2007, Motor premium increases have once again began to lose its momentum this year. Unless there is a remarkable change in underwriting practice in the coming months, we anticipate a further worsening of loss ratios during 2008.
As we have pointed out on several occasions in the past, the Motor insurance market is only able to achieve some semblance of financial respectability because insurers are living off releases enabled by past over-reserving. This has the effect of subsidising below-cost underwriting, but the spare fat will not last for ever, maybe just for another couple of years at a push. The way things are going, it will run out just as the squeeze caused by rising third party Motor property claims really starts to bite. The industry will then have to put up its prices quite dramatically or start to haemorrhage.
Necessary as such precautions are, insurers must go further and address the underlying problem. It means competing with CHOs by providing the same type of service as them, and it implies getting in early before anyone else becomes involved.
Policyholders should be educated to contact their insurance company as soon as there has been an accident. Claims departments, which are often notoriously slow to react, should be geared up to assess liability immediately and respond rapidly. Methods of communication should be re-examined, including the possible use of text messaging.
The objective has to be to ensure that the services offered to innocent third parties are fair and proportionate and not inflated by profits and referral fees. And, who knows, it could become a useful way to promote goodwill. They might become customers in the future.
To be fair, many insurers have started to respond by offering an improved service to innocent third parties, but generally only when asked to do so. That is often too late – the CHO may already be in there. In any event, there is a case for saying that this problem is best tackled collectively by the insurance industry as a whole, rather than by companies on an individual basis.
This diagram shows the growth of third party property claims since 2001, with the unbroken line representing the total cost of these losses to the insurance industry.
A recent incident involving a colleague well illustrates the advances made by the insurance industry in competing with CHOs, but also the continuing shortcomings, His vehicle was damaged in a car park collision. Although the other driver wrote to his own insurers within 24 hours to acknowledge fault, they were slow to put matters right.
My colleague eventually contacted them after two weeks and found them exceptionally polite and helpful – perhaps rather more so than they would have been a few years ago. The repairs were carried out promptly at a garage of the insurer’s choice, using a somewhat inferior but perfectly adequate replacement car. In other words, it was significantly cheaper for the insurer than using a CHO.
It has to be said, though, that my colleague only contacted the claims department because he had a professional knowledge of the insurance industry and felt motivated to co-operate with them in this way. Most members of the public will not be so helpful. Insurers will have to learn to react with much greater speed.
Such thoughts are not entirely new. Bill Paton, chief claims officer at Zurich made a similar point in a recent Post Magazine interview. “As insurers we need to do something,” he said. “I am not blaming the credit hire companies, they have only responded to a gap in the market.
“The future is very bleak if we try and tackle this as individual companies. We need to take an industry standpoint; we have to offer an alternative that brokers and our customers want.”
The question is, does the will exist across the industry and do insurance companies sufficiently appreciate the urgency?
The changes described here imply a cultural revolution at some insurance companies, and the idea will undoubtedly meet resistance. However, complain as they will about the methods used, insurers cannot return to a past when accident management companies did not exist. They can, however, take steps to control what happens after there has been an accident and do something to stem the surge in third party motor claims.
This article first appeared in Post Magazine in April 2008
