A Mexican standoff

Credit hire arrangements have never been the safest topic of conversation at any insurance gathering, but in recent weeks the simmering animosity has escalated into a full-scale conflict with insurers first over the barricades.

Insurers trying to cut their claims costs in these financially tight times are attacking their old foes, the credit hire companies, and the brokers that they claim are aiding and abetting them in adding millions of pounds to the credit hire process.

Insurers have started to speak out, with a string of high-profile attacks on the credit hire industry – including one from AXA chief executive Philippe Maso in last week’s Insurance Times.

Aviva, AXA and Zurich have been among the most vocal opponents of credit hire. Aviva’s director of claims Dominic Clayden, says: “I am not convinced that credit hire and the additional costs that it brings to our claims is worth it. This doesn’t feel like a long-term sustainable position. We want to say stop, as it’s not in anyone’s interest.”

There is no doubt that the costs are high. In 2008, according to Deloitte, insurers paid an estimated £490m to credit hire firms for supplying replacement vehicles to non-fault parties in motor claims.

When Deloitte reviewed the General Terms of Agreement (GTA) – a code brokered by the ABI for the past 10 years which covers 90% of the industry – it found that of the 3.1 million motor claims, about 990,000 had some form of third-party involvement. The average credit hire payment per case was £1,200.

Costs being driven upwards

However what is more contentious is exactly who is responsible for driving up those costs.

The claims process in motor and personal injury cases has become a frantic competition to capture the no-fault party, and with them the increasingly generous referral fees that claims management companies, credit hire firms and solicitors will pay.

Brokers do this, as do garages, recovery firms and the emergency services – claims management firms suggest that some doctors will pass a solicitor’s card to a patient. Insurers freely admit they do it themselves and that it was their fault that the whole thing started in the first place.

The strange thing is that while no one is happy with the current system and everyone agrees they are partly to blame, no one involved feels that they can afford to stop.

“We are referring people but we’re not happy to have to do it,” says Clayden. “It’s almost as if the market has created a position where because everyone else is doing it, we have to do it. Ultimately, it’s a situation where the revenue helps offset some of the significantly increased claims costs. We would prefer to see credit hire go from the market.”

The broker community has reacted strongly to being singled out for criticism. “To blame brokers completely for this is just wrong,” says Eric Galbraith, chief executive of Biba. “There’s a wider issue than just referral fees, that’s a red herring.

I would say one of the key issues might be hire costs and accident management companies’ processes.”

Credit hire companies themselves complain that referral fees have got out of hand, though they say insurers are partly to blame for playing them off against each other. When insurers are notified of a claim, they will also pass the no-fault party on to a chosen credit hire company. If their policyholder was at fault, they will do so to minimise the costs, perhaps securing a discount rate.

The payback for the credit hire company comes when insurers pass over their own no-fault policyholders, and the full costs of the hire are passed on to a rival.

“More than half of the growth of the industry in the past couple of years has been insurer-generated work,” says Tony Baker, director general of the Accident Management Association, which represents 34 firms covering 70% of the credit hire sector. “They’re busy referring claims themselves – it’s a big revenue stream for them.”

Referral fees from credit hire companies have typically been between £100 and £400 per customer, depending on the length of the hire and the type of vehicle, but according to Chris Shaw, commercial director at AI Claims Management Solutions, as the market has become more competitive they now routinely surpass these estimates.

“For the past three years, commissions have increased dramatically,” he says. “A number of firms are now paying commissions that are not sustainable.”

Who has benefited from all this extra money sloshing around the system is a moot point. Credit hire firms themselves are hardly in the best of health, with some supporting large fleets that have lost their residual value. Helphire, one of the largest, made a £59.3m pre-tax loss for the second half of 2008 and made 130 of its 3,000 staff redundant earlier this year.

Insurers say that the inefficiency of the system means they will always pay out far more than they make in referral fees. They accuse credit hire companies of ramping up costs by overcharging, providing better vehicles than are necessary, extending hire periods, delaying over repairs and passing claims over to third parties such as personal injury solicitors when there is no injury. Brokers, they say, are dropping their commission to win business and relying on referral fees to supplement their income.

Credit hire firms retaliate by pointing out that insurers inflate costs themselves by taking so long to pay their bills – under the GTA bills rise 7.5% after 30 days and 15% after 60 days. Some insurers, they say, have such a backlog that they do not begin to process claims for at least two months, and when they do get round to it, they prefer to go down the litigation route rather than pay up.

Insurers admit that they have themselves to blame for creating the conditions where credit hire companies could flourish. By habitually fobbing “Mondeo Man” off with a Nissan Micra, they left the door wide open for credit hire companies to offer no-fault drivers their legal entitlement of a like-for-like vehicle.

This is also part of the broker’s defence – they know insurers are unlikely to give their customers an equivalent replacement for anything better than a Group I or Group II car so they pass them onto someone who will. “The broker’s focus will be on maintaining business with their clients and making sure that they’ve got the right service and the right cover,” says Galbraith. “Most clients would say that they’re getting a good deal on the claims service, the point is that it costs money. This is an opportunity for insurers to look at how they’re going to provide it themselves.” Biba has set up a group within its motor committee to enter into discussions with the rest of the industry.

Insurers agree the claims service pre-GTA was lacking but that it has much improved.

“Insurers, ourselves included, have a lot to answer for,” says Bill Paton, chief claims officer at Zurich. “The industry was very slow in responding. I don’t think now there’s much objection to putting someone in a like-for-like car but we’ve been too slow.”

Court of Appeal judgment

But past failings can’t justify the status quo, so where do they go from here?

Insurers say they will continue to challenge credit hire costs in court, though a Court of Appeal judgment in June gave them little solace. In two separate car accidents, the no-fault parties’ insurers had referred them on to Helphire, while the at-fault insurer KGM also offered them replacement vehicles.

The judgment hinged on whether the claimants were entitled to the higher costs of the Helphire vehicle or whether accepting KGM’s offer would have mitigated their losses. Helphire won a clear victory – the only benefit the insurers could claim were clear instructions from the judge on how to win next time. Lord Justice Longmore said cold calls from insurers offering replacement vehicles should stop and criticised KGM’s letter to the claimants as lengthy and having “an unpleasant threatening tone”.

For all insurers’ sound and fury, they are powerless acting alone when referral fees have become part of the claims business model. As AXA’s claims director David Williams says: “It’s a market problem. It doesn’t matter if a reasonable proportion of insurers are doing things properly if just a few are not.”

Aviva, AXA and Zurich all suggest a new protocol for a world without referral fees, agreed between all parties, including brokers. Credit hire firms would be guaranteed payment within a certain time in return for adhering to service-level agreements, and brokers would pass claims straight to insurers or shift the notification burden back to insurers. In the long term, Clayden suggests a like-for-like vehicle for no-fault drivers could be written into policies, with credit hire firms providing hire cars at market rates.

In an ideal world, insurers, brokers and credit hire firms would drop their sharper practices and operate in a less adversarial way to bring premiums down for the consumer. However in the real world, that would be a breach of competition law, so it seems unlikely that any of this could be achieved through the GTA, which is mired in bad feeling and debate over rates.

Clayden describes it as a “sticking plaster on a bigger issue”. Williams is similarly lukewarm, but Paton is more blunt: “The GTA has had its day,” he says. “I think the situation is so bad now we need to start again with a blank piece of paper. We need a change of culture. There must be a better solution.”

Government intervention

All three agree that only government legislation can break the deadlock. “You won’t get people voluntarily giving up referral fees,” says Paton. “People are not going to give up a seven-figure revenue stream for the common good. The only way around is legislation.”

The Ministry of Justice is consulting on ways to cut legal costs out of the personal injury claims process, so you might think there is an opportunity to take a look at credit hire costs. Here, however, the process runs into another set of vested interests. Insurers’ strenuous lobbying efforts have so far been ignored in favour of claimants’ solicitors – who are major contributors to the coffers of trade unions, and therefore the Labour Party, via the same referral fee system.

There seems little hope, for the time being then, that this self-perpetuating system will stop. But Clayden is living in hope. He cites the example of Ireland, where motor premiums became a political issue and compensation payments are now decided by a government board. “We’re talking to the government and to opposition MPs. It is a slow process but just because it’s slow doesn’t mean we shouldn’t do it.”