There will have been a collective sigh of relief from the banks that for once the spotlight has moved off them and onto the insurance companies. For so long the insurance companies have been vocal about how they weren’t responsible for the financial crisis and weren’t like the banks and therefore they shouldn’t have to face tougher regulation and scrutiny just because they are in the Financial Services sector. However what is emerging from the investigation into referral fees paid by claims companies to the insurers demonstrates that some of the behaviours demonstrated by the banks can be seen in the Insurance industry as well.
The high premiums for Payment Protection Insurance subsidising and artificially depressing the true cost of personal loans (see http://www.itsafinancialworld.net/2011/05/ppi-sign-of-mad-bad-world.html), is seen to be replicated in the world of car insurance. Referral fees paid by claims companies to the insurance companies have artificially depressed the premiums for car insurance. Though whereas with PPI successful claims against the policies were very low (until the intervention of The Banking Ombudsman), claims companies have been far more successful in making the insurance companies pay out, particularly for spurious claims for unprovable whiplash, resulting in car insurance premiums rising, though not as much as they should.
Having been caught sharing customer information with the claims companies, AXA has set the example by declaring that they will stop the practice (though they have said that if the rest of the industry doesn’t follow suit they may have to restart). The parallels with PPI continue with the new CEO of Lloyds Banking Group, Horta-Osorio, breaking from the other banks and agreeing to pay compensation for mis-selling. The other banks followed and AXA must be hoping that the other insurance companies will also follow.
The initial reaction from the Coalition Government has been that this practice is all right as long as the insurance companies declare it up front. However after strong opposition to this from the likes of Jack Straw, the former Justice Minister, the Coalition’s position appears to be shifting towards banning the practice.
The insurance companies are not entirely to blame. UK consumers are obsessed with cheapness and therefore implicitly encourage companies to appear to be selling products cheaply. Whether it be cheap personal loans, cheap car insurance or cheap flights. Indeed the charges made for the use of credit and debit charges (not related in any way to the cost of the transaction to the airlines) to depress the perceived price of the flights is only yet another example this collusion between the UK consumer and businesses.
To date this has been wilful self-deception on the part of the consumer. The banks, insurance companies, budget airlines and all the other organisations that participate in this game would be doing everyone a service if they moved to a transparent system where everybody is charged the full price for the service or product they are purchasing. On that basis customers would be able to really compare, but then those businesses who aren’t the best wouldn’t want to do it, would they?