Analysis: The Motor Insurance Advisory Bureau has set out a road map to lower insurance costs, but it will have to deal with vested interests, writes John McManus
The Government, or more realistically its successor, will need to negotiate a number of head-on collisions with vested interests in any move to lower insurance costs, the most powerful of which is the legal profession.
"The problem is not accidents; the problems is the cost of claims," is the simple conclusion reached by Ms Dorothea Dowling, the chairwoman of the MIAB, after a four-year trawl through the bowels of the insurance industry.
The explanation as to how this situation came about is multifaceted, but legal costs have been singled out as the most important. Legal expenses, including expert witnesses etc, now account for just under 40 per cent of costs incurred by insurance companies when settling third-party motor claims.
The figure can be even higher with small claims and, according to the MIAB, fees can average 72 per cent of the compensation paid out on claims of £5,000 or less. When you realise that 80 per cent of all motor claims fall under the £5,000 threshold, you begin to understand the problem. The MIAB gives one example of how the legal fees involved in a £7,500 Circuit Court award came to £7,618.
The major reason why legal costs, as a proportion of the award, are so high is the extensive use of barristers in even the smallest of cases. About 60 per cent of insurance cases in Ireland are resolved with the involvement of barristers while in the UK the number is less than 1 per cent.
The vast bulk of UK cases - 52 per cent - are settled directly between solicitors and insurance companies.
The point has now been reached where legal costs are so high that insurance companies will only contest large cases. It simply is not economically viable for them to contest over 80 per cent of cases because the sums involved are too small.
From a business point of view they are better off paying the claim and passing it on to customers via higher premiums.
A significant number of the recommendations made by the MIAB are aimed at reducing legal costs. Two which were highlighted by Ms Dowling are scrapping plans to increase the size of an award which can be made by the Circuit Court as this will lead to fee inflation. The second is to introduce the promised Personal Injuries Assessment Board, which would provide a cheaper way of setting damages.
The MIAB also flags the issue of whether insurance companies might not have a vested interest in keeping claims high. As long as an insurance company gets its sums right, and its premium income exceeds claims, it need not be too concerned about the size of claims.
This is particularly true when your customers are legally obliged to buy your product as is the case with motor insurance. It can be argued that bigger claims mean a bigger turnover for the industry and hence bigger profits.
This analysis, which is contested by the Irish Insurance Federation, is backed up by the lack of competition in the market. According to the MIAB, three insurance companies control 67 per cent of the market and operate under a dozen names.
It is not so surprising then that the combined profits of Irish insurance companies over the 17 years to 1999 were £343 million, while the comparable figure for the UK - where there is competition - was £30 million.
The MIAB also comments on how public scrutiny can produce results. It noted that since the publication of its interim report highlighting overcharging of certain types of drivers, some insurers have dropped their premiums.
Ms Dowling made it clear yesterday that the behaviour of both the insurance industry and legal profession has called into question their right to regulate themselves.
The board has advocated a very hands-on attitude to be adopted by the proposed Irish Financial Services Regulatory Authority which will assume responsibility for the insurance sector. The reason is simple: third-party motor insurance is required under law and the companies that profit from this must be open to public scrutiny.
The legal profession may prove to be an even harder nut crack.
The board has recommended that the current court-based system under which fees are set be reviewed and possibly replaced by one that is independent of the legal establishment.
"Implementation would require a new system, backed by legislation," is the telling comment in the summary of recommendations published yesterday by the Government.