Article reproduced from the Insurance Post

This summer has seen more headlines condemning for routinely inflating motor repair bills. The allegations centre on the practice of subrogation under which the non-fault insurance directs the car repairs, and then passes the cost on to the at-fault driver’s insurer.

The practice is a sound one, reflecting long standing insurance practice from the days of sail. In practice though it has become increasingly common in recent years for the non-fault driver’s insurer to ramp up repair costs and vehicle hire times, knowing that a rival counterpart will end up paying the bill.

But there are efforts throughout the insurance industry to tackle this disruptive practice, which is seen as pushing up premiums for motorists. Insurers keen to end the practice are seeking bilateral agreements, and subrogation portals are attempting to increase transparency in the process.

The bad blood generated by the practice came to a head six years ago when RSA was accused of inflating repairs costs by getting other insurers to pay for repair bills through a subsidiary. RSA was eventually exonerated by the Supreme Court in 2014. In the same year, the CMA decided in its wide-ranging report on motor insurance to take no action on insurers’ repairs arrangements.

“The CMA decided not to do anything about it because it was too complicated. It’s dysfunctional but we can’t think of a way of ending it. They (insurers) are doing what the law has told them they can do,” says a senior body shop source. Using illustrative figures, the repair source explains that insurers will agree a rate of £25 an hour with the supply chain for their own customers’ repair jobs but will set the higher £45 rate for non-fault work.

The Supreme Court ruling and the CMA decision effectively gave insurers a green light to continue their repair practices, says Jason Moseley, director of the National Body Repairers Association. “They saw it as a rubber stamp to carry on with the practice,” he says. Moseley explains how it works. He says many of his member companies are uncomfortable with the practice and has written to the government*s small business minister Margot James requesting a meeting to discuss repair shops’ concerns. A spokesman for the Association of British Insurers disputes estimates published by the Daily Telegraph that the practice inflates repair bills by £750m, pointing to the CMA’s conclusion which put the figure at £4m. “I doubt it’s gone up that much. Insurers are not doing anything illegal here. The CMA carried out a very extensive three-year investment with no action as a result.

“It’s a sign of an ultra competitive motor market where insurers are doing everything they can to control costs which ultimately end up being borne by their customers. ” Focusing on repair is a diversion from the more important drivers of claims costs: the spiralling bills resulting from bodily injury cases, he adds. But while subrogation may look like a textbook example of mutually advantageous backscratchmg, it still generates friction between insurers, says Adrian Furness, director of claims at Covéa Insurance. Referring to a legal case that Covéa is currently undertaking against an undisclosed rival insurer, he says: “There’s something fundamentally wrong with a situation where it will cost a big company, which has potential for the best repair deals in the market, significantly more to repair a Ford Fiesta than us.”

The problem, says a spokesman for AXA, which helped to take RSA to court, is that companies will suffer if they don’t participate in the practice. “This practice has long been challenged by AXA but we, and other insurers, were forced to adopt it after a series of high profile court cases ruled the practice was legal. Any rebates received on these claims go to reduce the overall claims pot that we use to calculate premiums, and therefore, if we didn’t do this, our customers would face higher premiums.  “AXA spent many thousands of pounds challenging this process through the courts, but unfortunately we have to accept this way of dealing with claims unless there is any future change to the law.”  Paul Geddes was more bullish in defence of the practice in an interview with Insurance Times. The Direct Line chief executive contended that the current system sharpens the incentives for insurers to ensure that their repair networks are faster and more efficient.  But as one of the biggest motor insurers in the market, Direct Line can afford to take this relaxed position, suggests Moseley, who argues that the current system favours those with more market muscle, like Direct Line. “Bigger insurers can leverage more discount because they are putting more business through.” There are also tensions between direct insurers and those which get some or all of their business through brokers, says Furness: “Direct companies get more repair going through your network whereas with intermediaries it get divvied up so it’s harder to offset costs.”

David Butcher, LV=’s head of claims strategy, doesn’t believe that the picture is that simple, but it is easier for insurers to reach bi-lateral arrangements with counterparts which secure custom through a similar split of channels. “It’s easier for a wholly-direct business to reach an arrangement with another wholly-direct business.” Given the lack of incentives for insurers to sort out the problem of inflated repair bills individually, Moseley argues that the industry either needs to get together to sort the problem out. Otherwise, he says some intervention will be required either from the government or the CMA. Keeping things as transparent as possible is important for mitigating some of the mistrust which can help prevent relationships fraying within subrogation arrangements, suggests the repair source. “Unless you go into these bi-laterals with your trousers around your ankles and the utmost transparency, it will always end in tears.”

One of the selling points of the subrogation portals, which have been established since the CMA and RSA rulings to settle repair and vehicle hire claims, is greater transparency. The best established so far is the Validus portal, which is now dealing with 15 insurers covering about 70% of the motor market, claims the company’s chief executive Ed van Rooyen. “It puts the element of transparency right in the middle of the process so you can see what you are paying for. Insurers all had their own view of the world: the portal brings clarity and transparency in costs and value,” says van Rooyen. In addition, the portal offers greater efficiency, says van Rooyen, who claims that the average number of human touches a subrogated claim receives when it goes through the portal has fallen tenfold from 20 to two.

“Once we can get robots to make the payments it will reduce the human element. Hopefully humans will only take the first notification but that Will require more automation.” Van Rooyen adds that companies using the portal have also seen a significant drop in litigation levels with the average life cycle of a claim falling from 380 to 30 days. While LV= hasn’t signed up for Validus, preferring to set up a system with one of its own IT suppliers, Butcher sees a lot of sense in moving to online platforms. “We are spending a lot of effort to recoup the money we are owed. The majority of cases should be capable of being transacted with minimal friction.”  Aviva, which was one of the first insurers to sign up with Validus, now deals around two thirds of its subrogated claims through the portal, a proportion that it aims to push up to 80% by the end of the year, says Phil Williams, the company’s director of relationships.

Even though Furness is still sceptical about the industry’s repairs practices, Covéa has also signed up with Validus. “We’ve always done the honest thing: we look for like-minded insurers and say if they don’t inflate we won’t inflate with them. The portal enables us to deal with friendlies in an efficient and friendly manner: it builds that element of trust back and means you can have different model for people you see as not particularly friendly.” In his 30 years plus experience of working in the industry, Williams has seen bilateral relationships go in and out of fashion. “I’ve seen bi-laterals come and go: sometimes they are in and sometimes not,” he says, adding that there are currently a ‘lot of discussions’ within the insurance industry about setting up more bilateral arrangements.

Butcher feels that the motor market may have hit peak bilateral “No indication that they are eroding. It may be reached point of saturation where those willing or able to reach agreements probably have.” However Furness believes that any system that it relies on co-operation between commercial rivals will always contain a fundamental flaw. “Any industry that relies on an unofficial amalgamation of agreements between competitors is not optimal and likely to break down at any point.”