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Insurers launch bid to ban use of referral fees in injury claims

• Details of road accidents often sold on to lawyers
• Practice thought to have pushed premiums up 50%

The insurance industry is lobbying ministers to use the forthcoming legal aid bill to ban referral fees in personal injury litigation, amid concern that the practice has sent car insurance premiums soaring.

In road accidents, customer details are routinely sold by insurers, garages and even the police to personal injury lawyers or accident management companies who seek to ramp up customer claims and take a big cut. The business is estimated to be worth £3bn a year and has helped to push up the price of car insurance policies by 50% over the last 18 months. The insurer Axa has estimated that half of the premium increases are related to the surge in bodily injury claims.

James Dalton, the assistant director of the Association of British Insurers, which is leading the lobbying effort, said: “Referral fees should be banned. They are part of the merry-go-round of fees in the system and drive the compensation culture … The government appreciates that the cost of the dysfunctional civil litigation system we have are high and this is translating directly into higher motor insurance premiums for customers. They are cognisant of the fact that there is a lot of money sloshing around in the system.”

He is optimistic that a ban on referral fees could be included in the legal aid, sentencing and punishment of offenders bill, which is making its way through parliament. He said a ban needed to cover the whole spectrum of those receiving referral fees – garages, car repair shops, claims management companies and insurers.

The justice minister, Jonathan Djanogly, has described referral-fee profiteering and ambulance chasing as “symptoms of a rotten suing culture”, although he has stopped short of saying the government would ban them.

Today, shares in the insurer Admiral slumped 12% to £13.49, partly on the expected blow to its lucrative referrals business. It argued on Wednesday that a ban on referral fees would have little impact on insurance premiums, saying the real problem was lawyers’ fees. Unlike rival Axa, which said last month it would no longer accept the controversial fees, Admiral refuses to stop taking them.

“Referral fees are bad news and should be banned, but the real reform should be a reduction in legal fees,” said Admiral’s chief operating officer, David Stevens, noting that the “legal lobby has been very influential in parliament”.

The ABI is also lobbying the government to limit lawyers’ fees. Dalton noted that in the UK lawyers receive £1,200 from insurance companies for processing lower-value personal injury claims, whereas in other European countries lawyers only receive €300 to €400 a claim. “For every pound we pay out to the victims, there is an additional 87p in legal fees.”

Unveiling a 27% rise in half-year profits to £161m, Admiral gave every member of staff £1,500 in shares, a total payout of £8m. It has made regular payouts to staff since its flotation in 2004. The insurer, which insures more than one in 10 British cars and owns the price comparison website, also lifted its interim dividend by a fifth to 39.1p from 32.6p last year. The chief executive, Henry Engelhardt, cautioned that “injury claims and their related costs continue to rise in the UK market, something to which we are not immune”.

The market focused on the group’s loss ratio – the amount paid out in claims divided by the amount collected in premiums – which jumped to 77.5% from 67.8% in the first half. The combined ratio, which measures how well the underwriting operations are performing (a lower number is better), rose to 94.2% from 89.3% in 2010.

The market shrugged off a 27% increase in profit before tax to £160.6m. Turnover leapt 53% to £1.1bn, which prompted Engelhardt to say that: “It wasn’t so long ago that we were pleased to report over £1bn turnover for a full year.” © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds