Motor claims in the UK have very specific characteristics which are mind boggling when comparing them to the metrics of continental Europe. Firstly the frequency of personal injury claims is double that of France and Germany – is there something about driving in the UK that makes someone twice as likely to be injured when a car accident occurs? The second oddity is the frequency of whiplash claims. Fully 80% of personal injury claims in the UK relate to whiplash, compared to 47% in Germany and just 3% in France (figure 1).
These two factors contribute to the third point of difference: the average cost of claims. Whilst the higher frequency of more costly personal injury claims explains part of the differential, they are far from the only factor. All along the claims process, UK costs are above continental levels, with car repairs, for example, almost 50% more expensive in the UK than in France.
Looking in detail at the cost differentials, a lot of the differences are hard to understand. Of course, market practices and customer preferences for replacement of spare parts instead of repair could be one explanation, but not enough to justify the degree of difference. In 2015 the CMA looked into the UK auto claims ‘system’ and highlighted the role of the different players, including law firms, Claims Management Companies, Credit Hire Companies, repair networks and so on. The CMA also tried to sort out, in part, the commissions those players pay to one another, but ultimately came to the conclusion that the reforms required to fix it were too great.
Out of the £12bn identified as the overall cost of claims for the auto insurers, we estimate that £5bn are costs that add no benefit to the end customer. To give an example, if the proposed increase in the small claims threshold for road traffic accidents goes ahead (from £1,000 to £5,000), it would save the insurance industry £1-1.2bn in lawyers’ fees. All this for a cost (whiplash) which is virtually unheard of in continental Europe, where professional injury evaluation is the norm and the potential for fraud therefore lower.
Overall it is safe to say, that the UK PMI claims market is characterised by a ‘holistic’ system where everyone’s profitability depends on commissions and inducements. Thinking back to our first article in this series, commissions and inducements do not only drive claims cost, but are also translated into higher premiums, putting customers at a significant financial disadvantage. At the same time, they might also be an explanation for the Profit and Loss numbers, namely the additional revenue streams, suggesting very strongly that the status quo is quite acceptable to incumbents. We conclude therefore, that the UK motor insurance market is stuck in an inefficient model, with any one player trying to change the system alone would risk being bankrupted. However, as in any inefficient market, transformation may just be lurking around the bend – the question is only when that change happens and who will trigger it. We will dedicate the third article in this series to that question as well as a first discussion of how insurance companies can best prepare themselves for a possible disruptive change.