Claim costs: 34% rise between 2019 and 2023
The motor insurance taskforce should look at increasing penalties for lawyers and doctors assisting in claim fabrication or exaggeration, the Financial Conduct Authority (FCA) said yesterday.
It also called for work to reduce the incentives for claimants to use accident/claims management companies (AMCs/CMCs) – while recognising too that referral fees they and credit hire firms pay insurers contribute to higher claims costs.
The recommendations formed part of the FCA’s review of insurance premiums [1], conducted to inform the work of the taskforce, which the government set up last October [2].
Data from 12 major insurers – representing more than half of the motor market – showed that their claims costs had risen 34% between 2019 and 2023, from £6.8bn to £9.1bn; inflation in the period was 21%.
The average claim cost increased by 37% to £3,293, resulting in claims cost per policy rising from £309 in 2019 to £391 in 2023.
There was a lag seeing this pass through to premiums, which continued to rise in 2024, making them 40% higher than in 2019.
The insurers recorded an underwriting loss in 2022 and 2023 as a result, but the FCA pointed out that many earned non-underwriting income that largely covered losses or accounted for profits, such as profit commissions on reinsurance contracts, fees and charges, including credit hire referrals and premium finance.
The costs of repairing vehicles and property damage claims accounted for 65% of the overall increase, with third-party claims and claims processes not managed by insurers part of the problem.
“The prevailing view of insurers, supported by much of the data provided, is that CMCs and AMCs introduce greater complexity and cost, making efficient claims management and cost control more challenging,” the report said.
“Some insurers in our sample acknowledge the benefits CMCs can sometimes bring. These include reduced operational costs, additional revenue streams from referral fees and improved customer outcomes.
“However, insurers also told us CMCs and AMCs have significantly affected claims costs through prolonged resolution cycles, increased fees, higher litigation expenses and elevated fraud risks.”
There was also often “less incentive” for CMCs and AMCs to try to manage the cost and duration of claims compared to insurers, the report went on.
“Referral fees for insurers from CMCs and AMCs range from £30 to over £1,000. Some firms receive alternative compensation, such as solicitor dividends or commercial arrangements that offset other service costs. These fees and compensation ultimately increase claims costs, driving higher motor insurance premiums.”
The FCA recommended that insurers develop a good practice code to reduce referrals to others and capture the management of more claims. This should include considering how to mitigate “the current incentives for first-party claimants to use AMCs/CMCs”.
Credit hire was another factor, with “often less incentive for credit hire and repair organisations to try to manage the cost and duration of claims”.
While the number of referrals fell during the period, the average referral fee earned by insurers increased by 29%, to £565 in 2023.
Also, while the average car hire duration was broadly similar whether claims were brought under the General Terms of Agreement (GTA) or not, the cost of non-GTA claims rose by 62%, compared to 47% for GTA claims.
Though bodily injury was the head of claim that accounted for the highest proportion of total claims costs (32%), it was the only one with a modest increase – just 7% over the four years. The next lowest was the 44% rise in the cost of property damage.
The FCA said a fall in the number of accidents resulting in injury claims was “more than offset by a larger rise in the average cost of claims”.
For those with life-altering injuries, care costs were rising, “due in part to shortages of care workers”, while medical advances meant improved survival rates for those with severe injuries. An increase in e-bike and e-scooter usage has also led to more severe injury claims.
With smaller claims, “there is growing evidence that some claimants are exaggerating, layering and fabricating some minor injury claim types”.
Meanwhile, claims once considered simple and low-cost “increasingly surpass” the £5,000 small claims track threshold, the report said, blaming last year’s Judicial College Guidelines update among other factors.
It said the taskforce should consider introducing tariffs for other types of bodily injury or increasing the small claims track threshold.
Further, through engagement with the likes of the Solicitors Regulation Authority (SRA) and General Medical Council, the taskforce should look at “whether to increase penalties for those engaging or assisting in claim fabrication or exaggeration, particularly any professionals associated with this activity”.
There was no reference to the recent call by the Association of Personal Injury Lawyers for regulatory action against insurers [3] that bring spurious claims of fundamental dishonesty against claimants.
Other drivers of rising premiums were the rising cost of replacement vehicles, cost of theft and risk of fraud.
Among the recommendations to deal with fraud were higher penalties, “particularly where professionals are involved” as well as action to recover financial proceeds through the Proceeds of Crime Act 2002, and more work to bring stakeholders, including the SRA, together “to enhance the ability to detect and prevent fraud”.