LV= boss agrees motor industry is 'broken'

Private motor insurance is a “broken business model” and the Competition Commission (CC) probe into the market is “long overdue”, according to LV= managing director general insurance John O’Roarke.

Speaking at the I Love Claims motor conference in Portugal last week, O’Roarke cited FCA head of general insurance and protection Simon Green’s observation that the insurance industry was ‘broken’ because insurers can make more money from claims than selling policies.

O’Roarke said he agreed with Green, that the model was “indeed broken” and needed massive reform before it could start to earn the trust of its customers.

“The Competition Commission probe is unwelcome but essential and it gives [the industry] an opportunity to rescue its reputation,” he said. “I feel better about regulation today than I did five years ago.”

But O’Roarke said the problem that the CC faced was the separation of liability from cost control owing to the industry’s fundamental incentive to profit from claims.

That is, while it is a crime for consumers to exaggerate the value of a claim, it is common practice for many insurers to inflate their motor repair costs and recover this from the at-fault insurer. Profits from referral fees down the motor supply chain is also common practice.

“Insurance companies are profiteering through other insurance companies through the claims process and it’s very much damaging the reputation of the industry,” O’Roarke said.

Driving down costs

The CC said the goal of its probe into the market is to decrease the costs of private motor insurance, which it said is adding £200m a year to the bill faced by consumers.

The initial findings from its probe were released last month and the full report is due to be published on 14 September.

Chief among its recommendations is a ban on the referral fees paid to insurers and brokers by claims management companies, credit hire organisations and credit repair firms. This is similar to the ban put in place for personal injury (PI) referral fees that was introduced by the Ministry of Justice (MoJ) through the Legal Aid Sentencing and Punishment of Offenders Act (Laspo) in April last year.

But O’Roarke said that Laspo had failed to take out £1.5bn in costs out of the PI market through banning referral fees and that this strategy would not work in the private motor market either.

“We’re a nation of entrepreneurs and if the legislation changes, people who are affected by it will change their business models so they get around it. You only have to look at what’s happening with Alternative Business Structures with insurers owning law firms to see that this is not going to go away easily,” he said.

O’Roarke said he was supportive of a cap on the amount that can be recovered from another insurer in motor repair costs, which would put everyone “on a level playing field, all playing by the same rules”.

“There’s a lot of squabbling going on because insurers have got different views on [the CC probe], credit hire firms have different views on it, and brokers have got other views too. But if we’re going to get it right we just have to think ‘what’s the right thing for the customer’,” he said.

“It would be a great outcome for customers if the Competition Commission can achieve what it wants to do.

“But it’s such a big thing they’re is trying to take on – they’re trying to eat an elephant.”