Credit ratings agency Moody’s said AXA’s decision to longer accept personal injuries referral fees may potentially benefit the industry as a whole.
“The incremental legal fees paid by insurers as a result of this process (known as “claims farming”) more than outweigh the referral-fee income that insurers receive when they refer claims to lawyers”, the Moody’s report said.
“Therefore, any reduction in the use of claims farming is credit positive for the sector. Axa UK’s announcement builds on the reforms announced last year in the Jackson review and the increasing political awareness of claims farming and its impact on insurance pricing”, the report added.
The UK motor combined ratios stood at a disappointing 120%, the report observed, although personal lines motor insurance premiums have jumped by an estimated 40% in the twelve months to 31 March, 2011.
Insurers, while attributing the jump in premium rates and continued unprofitability of the sector to increased bodily/personal injury claims in recent years, maintained a large potrion of the cost of such claims often related to associated legal fees that companies have to pay.
“A reduction in referrals will reduce the legal cost of bodily injury claims owing to fewer claims incurring bodily injury/legal costs. Furthermore, we expect the legal fees to be lower and the claims settlement process to be quicker for those claims with a bodily injury component”, the report said.
“However, motor insurance collectively accounts for only around 30% of UK insurers portfolios thus, improvements in motor profitability will not transform the overall profitability of UK non-life insurers”, it added.
The Moody’s report, however, observed that AXA will be disadvantaged if other insurers did not follow suit. A lonely stance is unlikely to impact the market much since it’s the 9th largest personal lines motor insurer.