Why has probe into claims firms taken so long?

Insurers will no doubt have read with interest news that the Ministry of Justice is probing claims management companies. But there is also likely to have been an element of frustration as many will be asking why this has taken so long.

The investigation comes after banks complained that the controversial claims firms have been pushing through an excessive amount of invalid compensation claims on behalf of consumers who have allegedly had payment protection insurance (PPI) mis-sold to them. In recent weeks banks have been rejecting almost half of PPI compensation claims and have seen a “substantial increase” in the number submitted, according to Financial Times research.

The insurance industry will be frustrated that it has taken this complaint from the major banks to force the issue. For it is insurers that have long been complaining about the actions of ‘ambulance chasing firms’ and their role in contributing to the rising number of road traffic accident personal injury (whiplash) claims, which in affect has sent motor rates spiralling to record levels and pushed insurer’s claims costs through the roof.

Why has the MoJ not taken action until now? It has had ample warning about the growth of the claims management sector. Figures it published back in July revealed a “significant increase in declared turnover” by claims companies in the year ending 30 November 2010, from £370m in the previous year to £581. This included a 50% increase in reported turnover in the personal injury sector, up to £377m compared to £247.5m in the year before.

Then, in September, consumer watchdog Which? carried out its own investigation that discovered a “range of problems” with claims management companies’ handling of PPI mis-selling queries and urged the MoJ to take “swift enforcement action”.

What’s the solution? Privately, insurers are thought to be irritated over the way the MoJ has dealt with claims management firms – that it has not been properly prepared or resourced to regulate these companies since they have exploded in numbers in recent years – and that the FSA should take over the regulatory and enforcement powers. It may sound like a sensible plan, but insurers won’t be holding their breath.