Why motor premiums are so high and what to do about it

Motor accidents are down but claims are up - why?

Over the past year motor insurance premiums have increased by 40%.

Are motor insurance companies profiteering at a time when every household is feeling the pinch?

No: in fact motor insurance has not been profitable for insurers for many years as the cost of claims continues to rise.

So, if claim costs are rising, then UK drivers must be having more accidents?

Actually no. Department for Transport statistics show the number of accidents fell by 10% over the past three years.

Yet, in the same period, the numbers claiming for an injury suffered in a car accident has increased by 43%.

Frivolous and fraudulent

Sadly, some accidents do lead to serious injury.

However, the substantial increase in claims relate to smaller injuries, mainly whiplash, now running at about 1,200 new claims every day.

It is these that account for more than half of the recent increase in premiums.

It is strange that whilst the NHS spends about £8m a year treating genuine whiplash, insurers pay out around £2bn in compensation.

The UK seems gripped by an American-style compensation culture, fuelled by those who seek to make a quick buck.

Insurers are in business to pay all valid claims fairly and promptly, but increasingly incur frivolous or fraudulent claims, the costs for which are flowing into higher premiums.

How has this happened?

Two primary factors lie at the root of this situation.

Paul Evans of Axa explains how the referral fees "racket" can be stopped

Firstly whiplash claims are ripe for opportunists, or to put it bluntly, fraudsters.

Secondly, the "no win, no fee" legal environment, a system that permits recovery of high legal costs from insurers rather than the claimant, provides too great an incentive to try it on.

Changes in the law in 1999 restricted legal aid for personal injury claims in motor accidents.

The rules that followed - the no win, no fee arrangements - created an environment where claimants no longer had any interest in the level of costs run up by their lawyers

In 2010, the Ministry of Justice introduced a new process for dealing with motor injury claims of £10,000 or less and set a fixed fee for legal costs incurred at each stage of the process.

For a typical whiplash compensation claim of £2,500, the lawyer would earn a fixed fee of £1,350.

This, with other associated costs, brings the insurance company's bill to about £4,400.

The profits personal injury lawyers can generate from simple personal injury claims are so large that they want as many claimants as they can find.

Referral fees

From the fixed fees, lawyers can afford to pay fees to those who refer claimants to them.

This proved the catalyst for a rapid growth in claims management companies, the better of which provide a valuable service for those who have suffered loss.

However too many simply saw the opportunity for making money out of a broken system.

Referral fees are paid to many different participants in the events that follow a car accident.

When two or more vehicles are involved, even the insurance company of the not-at-fault driver will refer their customers details for a fee - a practice Axa has banned.

The insurer knows that the insurer of the at-fault driver will pick up the tab.

This new industry of finding potential claimants has led in turn to daytime advertising and a barrage of unwanted texts and cold calls.

You will be told you are entitled to compensation even though you may never have been injured in an accident.

Simply put, a claims management company will contact someone with a potential claim and then "sell" that person to a personal injury lawyer.

The money that changes hands is known as a referral fee - the average income today being about £800 per referral.

Access to justice

The personal injury and claims management lobby argue that banning referral fees will prevent people bringing genuine claims but we disagree.

Insurers are in the business of paying claims and do so on a daily basis.

In 2010 £27m per day was paid out on motor claims alone across our industry.

Less scrupulous individuals have also seen an opportunity for making money out of minor injuries.

If you are in a car that is hit by another vehicle - a rear end shunt is a common example - you may suffer some neck injury, or whiplash.

But, as there is no medical process in which a doctor can either diagnose or disprove whiplash, this area is ripe for possible fraud.

Fraud is a growing problem for our industry.

In 2010, 133,000 fraudulent insurance claims were detected, totalling £919m, an increase of 9% on the previous year.

What next?

This whole situation is dysfunctional at best, but given its impact on motor premiums, it is also immoral and unsustainable.

Reform is necessary and will not disadvantage those who suffer real injury.

Axa would like to see referral fees banned immediately.

But as they are directly related to the amounts of money lawyers are paid, we additionally call for a significant reduction in the fixed fees paid through the Ministry of Justice process.

If the average referral fee is £800, then a similar reduction in lawyer's fees would seem justifiable.

If fees are not reduced, a ban on referral fees will be completely ineffective and motor premiums will continue to rise.

It is clear to us that if these measures are introduced, motor premiums will reduce.

In Ireland, similar problems were addressed a few years ago by introducing a new scheme that takes lawyers out of the equation.

Motor premiums fell by 16% in the first two years of the scheme's operation.

Finally, we need to seriously consider how we contain the growth in whiplash claims.

A number of countries have taken action.

In Germany for example, there can be no claim for whiplash where the shunt takes place under 10km/h (6.2mph).

We must of course make sure that all genuine injuries are compensated.

So we advocate that government and insurers work with medical bodies to agree formal criteria for the diagnosis of whiplash.

It should be for the claimant to prove that they have suffered whiplash rather than for insurers to disprove it.

Only through these measures can we ensure that motor insurance premiums are no longer a pain in the neck.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Links to external sites are for information only and do not constitute endorsement. Always obtain independent, professional advice for your own particular situation.