At its heart, the insurance industry is a giant casino.
It takes your premiums, invests your money in the money market, then hopes to pay out less in damages and incidental costs than it has taken in.
The industry exists to deal with a lot of risks, not just motor liability, and using this simple business model insurers seem to be doing okay.
Aviva plc (formerly Norwich Union) is the sixth largest insurance company in the world. It employs 40,000 people worldwide. Its annual operating income is over £2 billion.
In 2008 Aviva ran a TV campaign featuring Elle Macpherson, Bruce Willis, Ringo Starr, Alice Cooper and Barry Humphries at a cost of £9 million simply to advertise its change of name.
So, yes, insurers are doing quite well.
Yet, if you listen to insurance industry spokespeople they’ll tell you they make no money out of car insurance and their motor insurance book is constantly in debit.
The Association of British Insurers (the ABI) will tell you the UK insurance market made an underwriting loss of £31 million in 2014. It will tell you the problem is the rising cost of personal injury claims.
But the last time the industry made a stated underwriting profit was 1994, years before the rise of Claims Direct and the endless “where there’s blame, there’s a claim” stream of adverts on cable TV.
Quite how this “loss-making activity” squares with the daily parade of nodding dogs, meerkats and opera singers, all seeking your attention and your credit card, might be difficult to comprehend.
The ABI figures compare payouts for claims with total premium income. But that’s not their business model. Their business model is taking premiums from you and me and investing them on the money market, long before they ever have to make any payout. So investment rates are a critical part of profitability.
And there’s the never-ending search for transactional revenue streams, which transforms each claim, and you as a claimant, into an insurer’s profit opportunity.
So after an accident, you’re routinely steered by your insurer towards their preferred providers — not because the quality of service is good, but because the insurer pockets a referral fee.
The truth is that while some elements of the insurers’ business portfolio might be in the red, the business as a whole — taking into account all the investment income, add-ons and referral fees it generates — is most definitely in the black. The CMA estimated the top 10 insurance providers alone made a profit of a whopping £1.85 billion over five years.
It’s in the industry’s best interests to have you and I believing it doesn’t make any money, but I don’t want anyone pulling the wool over your eyes. So before we get into the meat of this book, I want to share with you 5 myths the insurance industry wants you to believe…
5 Myths the Insurance Industry Wants You to Believe
Myth #1: Scotland is in the grip of a compensation culture crisis.
You’ve no doubt read of hanging baskets of flowers with “Danger — Flower Baskets Overhead” signs… Of schoolboys prevented from playing chestnuts unless they wear goggles… And of the good citizens of our snowbound cities unwilling to clear their own driveways for fear of litigation.
The Daily Mail, in particular, loves these “bonkers conkers” stories, almost all of which turn out to be groundless. When Lord Young carried out his Better Regulation Task Force investigation into the compensation culture, he was unable to find any evidence of it, just like every other study — including Professor Lofstedt’s Report Reclaiming Health and Safety for All.
The reality is that a something-for-nothing scroungers’ charter simply does not exist.
Workplace accident claims were down 60% between 2000-2010. Claims are particularly low in Scotland compared to the rest of the United Kingdom. Compensation Recovery Unit figures from the past three years show there were 892,463 claims in England, and just 38,819 claims in Scotland. Where one might expect a proportion of around one-tenth based on population, the figure is around one twenty-fifth.
Myth #2: My insurance premiums are going through the roof because of whiplash claim fraudsters.
The Office of Fair Trading is carrying out an ongoing investigation into the costs associated with car accidents. Around 70% of all car accident claims involve whiplash injuries.
In their evidence, the police thought there might be around 30,000 staged accidents each year in England and Wales, but this is really guesswork on their part. Figures quoted in The Times law page The Brief (April 13, 2016) taken from the Association of British Insurers show low instances of proven fraud.
However, the lack of reliable data doesn’t stop the insurance industry proclaiming at every turn that “the UK is the world capital of whiplash”.
Even if there may be a problem, though, it’s a disease particular to the English Patient. In evidence from the Institute and Faculty of Actuaries before the Commons Select Committee on Transport, it was suggested that a study should be carried out in other countries where the proportion of claims is significantly lower — such as Spain, Germany and… Scotland.
I started off by comparing the insurance industry to a giant casino, constantly reviewing and revising its calculation of risk. Well, what are these bookmakers saying about Scotland?
Currently according to Comparethemarket.com the average cost of car insurance in Scotland is £648, around £800.00 lower than the same vehicle insured in London.
The website Thisismoney.com cites Scotland as the lowest geographical area in the UK for motor claims, with only three people in 1,000 making a claim. Relying on data obtained by the Financial Times under the Freedom of Information Act, it says nine out of ten of the lowest postcode areas for whiplash claims following an accident are in Scotland.
Could this be connected to the fact there are comparatively fewer claims management companies operating up here? And that such claims management companies, where they are operating, aggressively encourage people with the flimsiest injuries to pursue frivolous claims?
I’ll let you join up the dots yourself.
Myth #3: Claimant fraud is rife.
The insurance industry goes out of its way to stigmatise and vilify accident victims. It says, often and loudly, the sector is rife with wholesale fraud.
Of course where there are financial incentives there will always be people who try to fiddle the system, whether it’s MPs’ expenses, corporate tax avoidance, or taking drugs to win the Tour de France.
There are around 70,000 fraudulent claims by the insurers’ own policyholders each year.
But it is not so easy to fake an injury claim. First of all, you have to have actually suffered an injury. Then you have to be examined by a qualified medical practitioner. And there has to be a link between the injury and the accident itself and surrounding events and narrative.
In serious cases, the insurers will put you under video surveillance and trawl your Facebook and Twitter posts. The industry makes sure there’s maximum publicity of the occasional few who are caught trying to cheat the system, with the support of newspapers with a clear anti-claimant agenda.
They then pretend this caricature represents normality in accident claims. If you ever have the misfortune to suffer an accident, you’ll learn the hard way that this is a fantasy.
Myth #4: If you deal with the insurance company directly and are reasonable with them, you will get a reasonable response.
This is the biggest lie of all. Read what this book says about “third party capture” in Chapter 5 — or check it out on Google. The insurance industry describes this practice as “Third Party Assistance”, which is Newspeak worthy of George Orwell.
Insurers will only play nice if they think there is something in it for them. Always remember that to the insurance industry, you are just a number — preferably NIL.
Myth #5: An accident claim represents a Golden Ticket to a Lottery win.
The BBC has reportedly paid out a six-figure sum to the Jeremy Clarkson assault victim. You’ve probably read how phone-hacking celebrities obtain five and six-figure payouts for emotional upset over breach of privacy.
So if Jude Law can get £130,000, John Prescott £40,000 and even Prince Harry’s pal Guy Pelly can get £40,000 there must be awards of millions of pounds for serious physical injuries, right?
If you do read of a big award for an accident victim, it will be related to loss of earnings or future round-the-clock nursing care costs.
Damages in the United Kingdom are fixed mainly by judges, not by juries of ordinary people as happens in the United States. As a result, in the UK there is no reality check on the kind of awards which should be made.
The current recommended level in the Judicial College Guidelines (used by the courts to assess physical injuries) for complete loss of eyesight, i.e. total blindness, is “in the region of £204,000”.
The truth is in the United Kingdom damages for serious and severe physical injury are modest to the point of miserable.
Despite appearances, this book is not about knocking the insurance industry. Motor insurance for all of us is a must-buy not an optional purchase. What we should be receiving for our insurance premiums is peace of mind, and that’s what this book will help you achieve.
It’s not all bad: many of my friends and colleagues have had positive experiences at a time when they needed help.
But you should keep your eyes open, and if you are a non-fault driver in particular you should always be aware your legal entitlements do not depend on anything any insurer does or tells you.
The logic of the business model is the industry must seek to minimise payouts of all kinds, and must also take advantage of any incidental profit opportunities the process throws up. This is harmless enough as long as it is not at your expense — the customer who paid the premium.
Unfortunately as you read this book and find out what really goes on, you’ll discover this is an industry which time and again puts its own interests first — and certainly before yours.
And like all well-run casinos, the house always wins.
I’ve written this book to guide you through the entire insurance process, from start to finish, so you can get the best and most appropriate deal possible for you. And so you can get the best possible outcome if you’re unfortunate enough to be involved in an accident.
Start at the beginning and work your way through — but you’ll find, if you have an accident, it’s easy to turn to the chapters that will help you immediately.
Chapters 1 and 2 show you how to get the best deal on your car insurance, and avoid common pitfalls.
Chapter 3 walks you through what to do at the scene of an accident, and Chapter 4 explains what happens depending on who’s at fault.
Chapter 5 will help you cope with practicalities after an accident.
And Chapter 6 will show you what to do if you’re unlucky enough to encounter an uninsured driver.
And finally, Chapters 7-10 show you how to get the expert legal help you need, and why you should always consider options other than those your insurance company pushes towards you.
I found the whole thing pretty eye-opening when I started digging into the industry. I suspect you will too.