Mar 28, 2024 4 min read

Failings in Motor Claims Raise Accountability Questions

Several unfair practices have been identified in total loss claims in the UK motor insurance market. On the face of it, this seems like a numbers problem. Yet this is far from being a ‘which valuation is right’ issue. This is about people and how they decide to shape important decisions.

total loss
The total loss settlement review doesn't make for happy reading

The FCA published a review earlier this week into how UK motor insurers were handling total loss settlements. This was a wider review than an earlier one that focussed on only a few of the larger motor insurers. What their review makes clear is that unfair settlement practices are not down to a few ‘bad apples’, but pretty widespread.

These are the findings of the review that stood out for me:

  • Some insurers were knowingly making settlement offers below the value the customer was entitled to under their policy;
  • Most insurers were making deductions for wear and tear, when this was already reflected in guide prices.
  • Some offers were being presented as reflecting the Financial Ombudsman’s approach, but without evidencing this.
  • Some insurers were outsourcing total loss settlements to organisations very likely to have a clear interest in achieving low settlement values, but with little to no management of that conflict of interest.

Awash with Data

The UK used car market is awash with data, and has been for several decades. In the 1990s, I spent five years focussed on what was then the biggest residual value placement into insurance markets. Central to that was the tracking of used car prices. Guides were aplenty, but each had their own character.

What mattered immensely was the condition of the vehicle at end of lease. Guides would present a range of valuations for a range of condition categories, and each category was very specific and pretty exacting. It was common for lessees to view the vehicle as in much better condition than it actually was – a bit like how we often think we drive better than we actually do.

An insurer who takes a particular guide price and then deducts a percentage for wear and tear is just not using guides correctly. This is not a misunderstanding thing ; condition is so central to the residual value that the use of a wear and tear deduction is no more than a decision to offer a sub-valuation settlement.

Now, I’m going to be pretty punchy on this. Insurers can’t apply fraud labels to claimants who present over-valued claims, but then use decision systems that put forward under-valued settlements. This is way beyond being a fairness thing – it is much more serious and needs to be challenged, if not by the FCA, then by a government body with stronger powers.

The motor market has plenty of experienced resource for inspecting seriously damaged cars. I once had three people inspect my car, each from a different stage of the insurer’s supply chain. It was so poorly managed by the large insurer that I didn’t know whether to laugh or cry.

This is Not About Data

On the face of it, total loss settlements seem to be about numbers. Yet that is far from being the core issue. Nor is it about any algorithms in the insurer’s claims decision systems. It is about management decisions to use their data and decision systems in a particular way. When you’re awash with data, you manage it by pulling and applying certain segments of data for certain purposes, and it is at the top of claims functions that such decisions are taken.

So the apparently prevalent practice of offering lower settlements until the claimant complained is a management responsibility. It’s a practice referred to as claims optimisation. Yet ‘optimisation’ is a misnomer. The practice is much more pernicious, drawing from a culture that puts financial performance over fairness. And that is the core, and classic, conflict of interest in insurance. So motor insurers have been found wanting.

Making Insurers Care

Do those motor insurers using claims optimisation care though? The FCA review points to levels of care below what the regulator would like. And comments online in response to the FCA review suggest motor insurers really don’t care that much. Yet at the same time, a lot of general insurance people recently came out in support of an AI code of conduct for claims operations. It was great to see that engagement and support, but as I said at the time (more here), practices like claims optimisation cannot be justified within such a code.

This leaves me to suspect that either there’s a misunderstanding about such codes, or there’s some ethics washing going on. Ethics washing happens when an organisation says they’re fair, but don’t then practice it.

This should be where the regulator comes in. After all, their rulebook expects insurers to act fairly and to deliver fair value. Yet their total loss review is a masterpiece of generic writing: phrases such as ‘some insurers’ and ‘are likely to’ abound in it. Most claims directors reading it would feel little no threat from it.

Unless of course, the regulator is applying greater pressure behind the scenes. On that, the regulator is silent. We have to assume that warnings will have been handed out, scrutiny increased and more detailed reporting expected. Just like last time they found similar practices in UK personal lines insurance, and that was a decade or so ago (more here).

More Challenge Needed

Whatever the FCA did a decade ago (when it first reported practices linking settlement offers with complaint potential) has clearly had little impact in motor insurance, and I suspect by association other personal lines of business as well. My question therefore is about what they will be doing differently this time round.

While this review covered a period before the Consumer Duty came in, it is well within the remit and time of the Senior Managers and Certification Regime. That talked about senior management accountability. As I wrote here, that 'talk' has been very slow to be 'walked' by the regulator.

To put it simply, the practices exposed in this review need to be challenged earlier and more strongly. Insurers seem to feel only a faint pressure from regulatory consequences.

What we may have then is a situation where insurers complain of too much regulation and the associated costs of complying with it. Alongside this is a sector using a compliance model that lacks traction on actual behaviours (more here) and an environment putting only a faint pressure on them from regulatory consequences.

So what’s the solution? What seems to have been preferred is more regulation, to address ‘sticky problems’ in new ways, but which seem to simply build up the complicatedness of the regulatory and compliance environment. Perhaps a better way would be to apply existing regulations in a more impactful manner. Let's see what emerges as a result of this total loss review.

Insurers often commission tailored research on ethical issues to inform their decision making. What they value is an independent viewpoint from someone who understands their market. Get in touch if you would like to talk about independent research relating to total loss settlements.
Duncan Minty
Duncan Minty
Duncan has been researching and writing about ethics in insurance for over 20 years. As a Chartered Insurance Practitioner, he combines market knowledge with a strong and independent radar on ethics.
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