How it works - car insurance

Own a car?  Well, hopefully you are in the majority who buy insurance.

Each year it costs you more than it did last year, despite the fact that you have had no claims, no speeding tickets and your “no claims discount” has risen.  The only way to cut the cost is to change insurer.

Bad luck – you have an accident.  Your car is damaged, somebody else’s car is damaged and it is the other guy’s fault.

If you have comprehensive cover, you will claim for the damage to your own vehicle on your own policy and leave it to your insurers to get their money back from the other side. If the car is a write off, then the insurers will pay you far less than you think it is worth in monetary terms.  Sentiment – forget that.

If it is repairable, the insurers will insist that you take it to one of their approved dealers. These people may be “approved” because they pay the insurers for the business and/or charge a discounted rate for the work they do.

They will be cheaper than your preferred garage, first, because the insurer puts more business their way and, secondly, because they will compromise on the repair. Where possible, approved manufacturers parts will be replaced by cheaper alternatives and luxuries like door safety bars can be dispensed with.

These approved repairers will be directed by insurers to buy their paint and other parts from specified suppliers.  Those providers then pay what is euphemistically called a “rebate” to insurers – millions of pounds a year (See Above the law).

If you need a hire car rather than a courtesy car, you will go to the company of insurers’ choice, even if that is not convenient to you.  You will get what you are given.  Why? Because the insurers have hammered the rates down so that the hire car companies need to look for savings wherever they can.  They are probably also paying a “rebate” (See Business as usual).

Did I mention that you were injured?  Oh, well you will have had a call by now from somebody who seems to know all about your business.  How can that be?

The chances are that you won’t have been told that insurers have passed your personal details to a claims management company (“CMC”).  They don’t make a big fuss about it because, guess what, the insurers just pocketed hundreds of pounds by selling your claim.

The CMC then adds its margin and sells your claim to a “panel solicitor” who is prepared to pay for it. Often the solicitor may have at this stage an outlay of £800, and they haven’t started work yet.  The value of the claim may not be a great deal more than that so how are they going to process it without running a loss, let alone making any profit?

The answer is that they give it to unqualified staff pushing buttons on software that does a very ordinary job within set parameters.  They are not going to take risks like issuing proceedings and insurers on the other side know that (see Peanuts).

The claim will settle for less than it is truly worth so that nobody in the process needs to waste more time working for the same reward of a pitiful fixed cost,  most of which has already been eaten up by the backhander that your own insurance company secretly trousered when selling your claim.

In many cases the referral elsewhere may have been entirely open because you bought from your insurer when you took out the policy (though you might not have realised it) what is called before the event insurance (“BTE”) supposedly to cover you for the cost of claiming your uninsured losses.

In many cases the costs of the solicitors appointed by the insurers aren’t covered by the policy at all.  What happens is that the preferred solicitors pay insurers a fee (surprise!) for the case and then they run it on a conditional fee arrangement in exactly the same way as we or any other independent would.

Technically, insurers will say that they cover any adverse costs i.e. the risk that the claim fails and the other side want their legal bill paid.  In reality this almost never happens.

So, you might wonder why you pay £20 or £30 when you take out the policy for this BTE cover?  The answer is it’s to help pay the insurers’ administrative costs in making sure that they pick up another referral fee when they email a copy of your claim form to their panel solicitor.

And that’s how it works.  The insurance company takes what a large number of lawyers would consider to be bribes, according to the Bribery Act 2010 from everybody involved (see Bribery - every step of the way).

Next year your premium will rise again, just like executive salaries and shareholder returns. Insurers will blame victims and lawyers for claiming compensation and the costs incurred whilst claims managers argue black is white to put off the day when they have to take out the cheque book.

This is why the Office of Fair Trading has described the insurance industry as “dysfunctional”.