Car Hire Ruling May Increase Claim Costs, a Credit Negative for UK General Insurers

Car Hire Ruling May Increase Claim Costs, a Credit Negative for UK General Insurers

Last Wednesday, a Divisional Court in London ruled that it would pass evidence to UK Attorney General Dominic Grieve, who will review cases involving disputes over fees that insurers were liable to pay to credit hire organizations (CHOs). The review will likely result in the reopening of thousands of car hire cases, and could result in UK general insurers facing increased payouts to CHOs, a credit negative for insurers.
CHOs provide replacement vehicles to motorists involved in traffic accidents, and in recent years have become an integrated part of the claims process in the UK. Insurers argue that CHOs inflate car hire rates,23 thereby increasing claim costs. Furthermore, the Association of British Insurers claims CHOs add up to 10% to the cost of car insurance. For their part, CHOs argue they provide a valuable service to victims of car accidents.

In the UK, there are approximately 100 CHOs, by far the largest of which are Helphire, Ai Claims Services and Accident Exchange (AEL). Since September 2009, AEL has been locked in a legal dispute with the now-collapsed consultancy company Autofocus,24 which compiled reports on car hire rates that were used by insurers in disagreements on fee levels with CHOs. AEL alleged that Autofocus deliberately and routinely falsified such reports and understated car hire rates, which ultimately benefited insurers.

Last Wednesday’s developments come after Lord Justice Aikens in December 2011 ruled that AEL had presented sufficient evidence of wrongdoing to justify reopening four cases that had been previously settled based on Autofocus evidence. These four cases may be just the tip of the iceberg; AEL claims that the wrongdoing may have taken place over at least three years, between 2007-10, and could involve up to 30,000 cases. AEL is already appealing a further 4,000 cases that it estimates lost the company £20-£50 million in car hire fees. Helphire has announced it will appeal cases, too.
According to Autofocus records, Aviva Plc (A3 stable), Axa (A2 stable), RSA Insurance Group (hybrid Baa1 stable), Brit (unrated) and NFU Mutual (unrated) are among the insurance groups that most frequently used its services and consequently would be most affected by successful appeals. However, we believe that these rulings also have credit negative implications for the entire UK general insurance industry because all insurers are likely to face higher car hire fees.

CHOs are now in a stronger legal position than ever before and could have grounds to increase average car hire rates based on AEL’s evidence presented. Given that 60% of third-party motor insurance claims include a payment in relation to credit hire vehicle fees,25 up from 25% in 2006, CHO rate increases would undoubtedly add further pressure on insurers’ claim costs.