Insurance companies will buy law firms in response to the ban on referral fees, but this will not help to lower the industry’s claims bill, an analyst has predicted.
An investor report on Admiral Group, produced by Kevin Ryan of Investec, said the referral fee ban will cost the company £7 of income per vehicle, or £21m in total, and that “it seems entirely plausible that Admiral could react to the ban… by buying in a firm of lawyers and offering their services as an add-on for their insureds”.
He continued: “It could thus gain an internal transfer fee and might be even better off than before the ban by explicitly charging customers for access to a lawyer in the event of an accident when a policy is first bought. If this approach is adopted, it seems likely to us that it would be some time before the government or the regulator decided to tighten the terms of the solicitor’s referral fee ban to encompass this new way around the income loss problem.”
It emerged last month that Admiral is in talks with national law firm Lyons Davidson, but any arrangement will fall short of the insurer acquiring the legal practice.
Mr Ryan said other insurers may well react to the ban in the same way, but argued that – despite some predictions to the contrary – “it will not help to lower the insurance industry’s claims bill”.
“This is because the UK motor insurance industry has been inherently unprofitable for at least 17 years and it has survived by the cross-subsidy of selling customers related products, like breakdown cover, at the point of sale. This cross-subsidising means that motor insurers charge the wrong technical price for the motor cover. This pre-dates the rise and rise of claims management companies and ‘Tesco law’, which has skewed motor insurers’ results in recent years.”
Further, “steady inflation can be expected in the cost of third-party damage claims to motor vehicles”, while “the rise in bodily injury claims is merely another iteration in this upward spiral”.
Mr Ryan said that “claims costs move upwards continually; it is an immutable law of insurance”, and pointed to the 9% increase in damages recommended by the latest Guidelines for the Assessment of General Damages, as well as the 10% increase in general damages being introduced from 1 April as part of the Jackson reforms.
“Claims volumes would need to collapse to see insurers benefit from legal referral fees exiting the market,” he predicted.