Get ready for your close-up

In these turbulent times, I think we can be certain that the insurance industry will not escape the scrutiny of the outside world. With this increased interest will come greater questioning about our practices. What we have to ask ourselves is: “Are we happy with what they will find?”

There is one area of practice in our industry which cannot be attributed to the current economic madness, and it would be unrealistic to think that it will continue to remain unchallenged. I’m talking about referral fees.

Guerilla in the room

It is a commonly held view that the credit hire market is saturated but, in the continued drive for revenue, attention has now turned towards referring personal injury claims, which is causing a marked increase in claims frequency. Indeed, it seems that the procurement arms of most insurers are now building revenue generation and conversion targets into agreements which, put simply, is unrealistic.

I read AXA chief executive Philippe Maso’s recent comments in Insurance Times (2 July, page 18) with interest, as he quite rightly highlighted that referral fees are damaging for all insurers and called for radical industry action.

I, amongst others, have in the past called referral fees the “guerilla in the room that nobody wants to talk about”. But considering the average legal cost of pursuing a small personal injury claim is £1,400, with the referral fee representing around £700 of that cost and showing no signs of abating, it seems bizarre not to talk about it!

Furthermore, we have recently seen referral fees being built into loss adjuster and supplier models, hitting our customers from another angle. Meanwhile, we continue to expect our policyholders to accept the inevitable increase in their premium without explanation.

In the current economic climate, with greater scrutiny from the FSA, we have to question where the current practice of referral fees sits in terms of our obligations to treat our customers fairly and conduct our business in a transparent way.

If we consider this topic as consumers ourselves, the answer becomes obvious. Would we feel comfortable and accepting of the explanation that a substantial part of our insurance premiums go towards the buying and selling of our claim? The man on the street would quite rightly label this as grossly unfair. And given that it is the consumer’s claim, why should they not share in the spoils? After all, non-fault motor claims involving personal injury, credit hire and credit repair could be worth up to £1,000. Not an insignificant sum of money, particularly in current circumstances!

Lucrative process

A more recent and worrying development is that of negative commission models. I am amazed that we have reached the point where a broker can make more money from a referral fee than from commissions, leading them to write business in the hope of an accident resulting in a non-fault referral!

Left unchecked, we will see more people wanting to get involved in what appears to be a very lucrative process for some, continuing the upwards spiral of costs even further for us as an industry and, ultimately, our policyholders.

It’s time for the insurance sector to get its house in order and learn from the mistakes of our counterparts in other areas of the financial sector. We need to preserve the trust of our paymasters – the consumers – by working together to develop a viable solution that satisfies all those stakeholders involved. IT