It is time to move forward as one

The market inefficiency and increased customer prices resulting from the credit hire industry is a unique issue in the insurance market: all insurers agree it is a problem that needs to be dealt with but none have been prepared to take the steps required to deliver real change.

Context is vital in such a major debate. Firstly, credit hire organisations (CHOs) began to offer non-fault accident victims a like-for-like hire car to keep them mobile. This was partly because insurers were not meeting this need. Secondly, CHOs thrive because of leads supplied from insurers, brokers and garages. All three groups make significant revenue from these referrals. Thirdly, CHOs’ hire rates are often higher than the ruling market price and their repair times are generally longer than insurers.

The credit hire market impacts on different stakeholder groups in different ways. Insurers take referral fees but also get referred against by competitors. Assuming an equal incidence of fault and non-fault accidents, the insurance industry will pay out significantly more to CHOs than they will receive back in referral income. If every insurer did not refer any non-fault cases, they would all be significantly better off and a layer of costs would be removed.

Therefore the issue is not the cost of the hire but the embedded referral fee within the credit car hire rates.

CHOs find themselves with a risky and costly business model defined by their adversarial relationship with insurers. Any industry with a dependency on favourable court rulings for a proportion of its revenue, with high associated legal costs, is at risk from an evolving legal environment and cashflow problems. The law as it stands provides CHOs with the foundations for their business model but recent legal precedents are shaking these foundations. With this in mind, CHOs must consider ways to move away from an adversarial model toward a contracted partner-based relationship with insurers. This will make their model more sustainable. Meanwhile they can be sure that insurers will continue to chip away at the existing legal position.

The ABI has made some progress toward controlling the credit-hire market through the General Terms of Agreement (GTA).

However, the GTA has not solved the underlying inefficiencies of the market and is struggling due to a lack of agreed overall governance and diametrically opposed views over daily rate remuneration. Some insurers have been seen to formally abandon the agreement recently.

When simplified, the dynamic of the credit-hire market is that CHOs have to make a sufficiently large margin to pay referral fees to insurers, brokers and garages. Insurers are the source of all CHO revenue and fund this from their loss ratios. This is passed on to customers in the form of higher premiums.

Ultimately the real challenge is to remove all referral fees from the model. One possible solution would be for insurers to always provide fast and free, like-for-like vehicle hire in all cases. This could be direct or through CHOs, where rates are fair and reasonable by removing referral fees, with a supporting no-quibble recovery process between insurers. Insurers would be better off in proportion to the size of their book and would benefit from a considerable improvement in loss ratio.

Without CHO referral income, brokers would have to find an alternate source of income but their expenses could also be reduced by passing fault notification of loss back to insurers.

CHOs would need to evolve their business model to survive, contracting with insurers for the supply of hire cars. Insurers would also have to make sure they were as swift as CHOs in the delivery of this service.

Then, ultimately, through the market operating more efficiently, customers would enjoy lower premiums for the same service.

It is time for a concerted effort from insurers to work with government, brokers and the ABI. It is time for a change.