Comment: The Rising Cost of Car Insurance

21st March, 2011

The BBC recently reported on a Transport Select Committee investigation into the cost of motor insurance. In their report, ‘The Cost of Motor Insurance’, the Transport Select Committee criticised insurance firms for receiving ‘referral’ fees for giving the names of individuals involved in car accidents to lawyers. The Select Committee suggests that accident victims are also ‘encouraged’ to claim compensation for any injuries sustained, with this inevitably pushing up both the number of claims and cost of insurance premiums.

Representatives of the insurance industry dispute the assertion referral fees are a major reason for increased insurance premiums. Instead they point to the existence of a growing ‘compensation culture’ which has led to more people suing for injuries they sustain as a result of an accident. In turn, they argue, this has led to increased legal costs and more compensation payments, which are then passed on to drivers in the form of increased insurance premiums.

The picture is muddied even further by an increase in insurance fraud linked to ‘staged accidents’, where a car stops suddenly for no apparent reason in front of another car driven by for want of a better term can be called the ‘mark’. Following the ‘accident’ the people in the car in front all make personal injury claims. An increase in uninsured drivers further compounds the issue and further adds to the cost of car insurance.

So which of the above arguments is right and who should we blame for the increase in car insurance premiums? Probably the most honest answer is to say that they are right to a degree, with each viewpoint reflecting a different aspect of the overall picture. For instance, the evidence collected by the Select Committee clearly points to the existence of ‘referral payments’ and no-one disputes the existence of uninsured drivers or that ‘staged accidents’ occur and are on the increase. Nor can the existence of a ‘compensation culture’ be dismissed; after all who hasn’t seen the TV adverts from legal firms advertising their expertise in fighting personal injury claims on a ‘no win – no fee basis’.

When faced with all these pressures on car insurance premiums the question then becomes one of what can be done to tackle their seemingly inexorable rise. The Transport Select Committee make a number of suggestions in their report, including the capping of ‘referral fees’ and the establishment of an industry funded scheme to tackle fraudulent claims.

On the face of it these recommendations appear to be a step in the right direction but would they really have much of an impact? Surely a reduction or even the abolition of referral fees will not stop the number of personal injury claims because in all likelihood fees would be paid in some other form; possibly through contractual ‘retainer’ arrangements between insurers, accident recovery and legal firms. Indeed many legal firms already take out insurances when pursuing a client’s claim to cover the eventuality that the third party insurers will not pay. Similarly the costs of any industry funded anti-fraud scheme will inevitably be added into the insurance premiums.

Perhaps the answer then is for individual drivers to take greater personal responsibility when renewing their insurance. There are a number of practical steps they can take like shopping around for the best price, reducing their annual mileage and even changing their car for one in a lower insurance group. Even by taking these steps it is doubtful whether much will really change because after all accidents will happen and those that sustain injuries will legitimately want to be compensated for any pain and discomfort they experience. Likewise, insurers, accident management companies, legal firms and credit management companies all need to be profitable in order to survive. We can only conclude therefore that no matter what measures are put in place that insurance premiums will continue to increase, albeit possibly at a slower rate than in the recent past.

The BBC Online news report can be accessed at:

The Transport Select Committee report is available at: