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Admiral could become Rear Admiral if referral fees banned10 July 2011by Donald MacKenzie The Government initially rejected the Jackson Report recommendation of banning referral fees in litigation, including in car insurance injury claims, despite embracing all of Lord Justice Sir Rupert Jackson's other key proposals which are included in their Legal Aid, Sentencing and Punishment of Offenders Bill, which was debated in Parliament for the first time last week. Following Jack Straw's public statement that referral fees are a 'racket' that pushes up the cost of car insurance, the Government seems to be preparing the ground for a rethink on this issue with a ban now looking more likely.  Justice Minister Lord McNally recently said: “The Government are sympathetic to the idea of a ban on referral fees and are looking at how to tackle the issue as part of our wider reforms, and at how we could do so in a way that would be effective.” Lord McNally also stated that the Government is going to conduct a study into how a referral fee ban could best be implemented. If that study confirmed the feasibility of a referral fee ban, then that would result in an ammendment to the Legal Aid, Sentencing and Punishment of Offenders Bill to include a ban. As McNally pointed out, the Transport Select Committee and the Legal Services Board have recommended greater transparency rather than an outright ban on referral fees. However, the Chair of the Transport Select Committee, Loiuse Ellman, has said that she will re-open their enquiry into the high cost of car insurance to specifically re-examine the issue of referral fees in the light of Jack Straw's evidence. The likely outcome will be the Committee's support of a referral fee ban. The Legal Services Board was publically lambasted by the Law Society for failing to recommend a ban and the latter has written an open letter to Justice Secretary Kenneth Clarke to call for a ban. Many other legal stakeholders including the Bar Council and individual injury lawyers also want a ban. Most car insurance providers favour a referral fee ban and the major French-owned insurer Axa has already said that it will stop accepting referral fees from lawyers. It is becoming clear to the Government that they cannot realistically continue to refuse to ban referral fees in view of compelling evidence in support of a ban along with a growing public debate that prevents them from kicking the issue into the long grass via a protracted investigation. There are numerous causes of the ever-increasing cost of car insurance, the main one being the high number of personal injury claims and their associated legal fees. The current Jackson-related Government Bill is expected to reduce the cost of the latter but it is the banning of referral fees that will make the biggest difference. From the insurer's perspective, their income from insurance premium payments alone has not covered their underwriting costs for three decades. Indeed, this was misleadingly reported recently following a Deloitte report, when it was suggested that the car insurance industry had lost £2bn in 2010. Indeed, car-insurance-uk-supermarket.co.uk was the only news outlet at the time that explained why this figure was misleading - it does not take account of other income sources for insurance companies. These include add-ons like legal expenses cover or breakdown cover, premium investment income and, importantly, referral fee payments. When you take account of these income sources, Admiral Insurance (that is included in the FTSE 100) in particular, had been turning a healthy profit. However, 52% of the Admiral Group's £142m profit in 2010 was attributed to 'ancillary' sales, a significant proportion of which would be from referral fees paid by injury lawyers. This could make Admiral vulnerable to a referral fee ban should it occur. However, car insurance companies are (at worst) relatively cost-neutral in relation to referral fees as while they receive them, they also pay for them in settling claims. While their income will fall, their underwriting costs (due to referral fees) will also drop. Indeed, if a referral fee ban improves efficiency in pursuing claims (as it should), there should be a net gain to insurance companies. Certainly, most see it this way and that is why they are in support of a referral fees ban. For car insurance providers to rely on 'ancillary' income rather than premium receipts for profitability, however, is a risky business model as it does expose them to risk if the referral landscape changes as there will be a phase (of many months) when underwriting costs that include the cost of referral fees (and their impact on uncompetitive services provisions) will continue until they have all cleared following the ban. This could increase premiums further for the motorist, although it should only be a short-term effect if insurers are willing to pass future savings back to the consumer. At the end of the day, a referral fee ban is good news for motorists, although it could pose problems for Admiral and other car insurance providers, albeit, largely only on a short-term basis. |
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