End the subrogation vicious cycle

The insurance industry received two body blows this week. The government-backed report on the summer riots lambasted insurers for not paying out claims, leaving businesses in the lurch. And Jack Straw threatened publicly to lead a House of Commons bid to nationalise motor insurance in areas where the private sector is failing to act competitively.

Insurance is becoming the whipping boy of politicians - but it does not help itself. As our investigation into the scandal surrounding the subrogation of claims costs demonstrates, nearly everyone’s got a finger in the pie.

Jack Straw’s comments caught the public imagination earlier this year, as the industry really does have “dirty secrets”. He has now weighed into the debate on subrogation, telling us that the practices surrounding repair costs are another example of the industry’s malpractice. Most, if not all, of the insurers crying ‘foul’ over RSA’s inflation of repair costs are pocketing cash from arrangements that are ethically if not legally similar.

This process, like referral fees, has become a vicious cycle of individual insurers seeking to raise some money to offset the cost of being on the receiving end of the practice. But, again like referral fees, it has produced a system whereby no one benefits, and the consumer ultimately picks up the bill.

So what to do? Aviva’s David McMillan makes a sensible suggestion: why doesn’t each insurer pay its own repair costs, regardless of fault? Then it will be in their interest to keep costs down and customers will ultimately benefit.

If the industry doesn’t clean up its act, the current case against RSA will be the first of many. If the court finds RSA guilty of illegally inflating costs, what’s to stop the insurer launching its own legal attacks on rivals milking cash out of the system in other ways? The worst-case scenario is that insurers could find themselves stuck in a tangle of costly and damaging legal battles. As the events of this week show, there are far more important battles to fight.