Is it a surprise that the percentage of people who have a 'Before the Event' (BTE) Legal Insurance policy has been dropping over the last few years?
During periods of recession, luxuries such as non-compulsory insurance often need to be jettisoned in an exercise of belt tightening. What surprises me however is the extent of the recent drop-off. DAS have reported that take up was running at 80% a few years ago but is now down to 50%. No wonder claimants are increasingly looking to After the Event Insurance as a better deal - they only take out a policy when they actually need it and don't have to pay for it unless they win.
The Government of course made their view clear 2 years ago when the Jackson report was published. They believed that the solution for claimants was a greater take up of BTE but they clearly did not know the market well enough - both the way it operates and the sensitivity to economic times. You see the cost of BTE Insurance has for years been supplemented by referral fees. BTE insurers have until now actually encouraged claims by ringing around their policy holders to see if they had had an accident. Why? Well, if there was a claim, the insurer could sell it to a solicitor for several hundred pounds. Not just that but they would have an 'arrangement' with the solicitor that there would never be a claim on the BTE policy.
So the claimant got compensated, the solicitor got a case and the BTE insurer made lots of money. It became so lucrative that often policies were virtually given away far below their true cost - sometimes for just £10.
But that was before the recession - now savy drivers have began un-ticking the 'Do you want Legal Insurance?' box on their car insurance renewals, thereby saving themselves money. After all - if they did have a claim they knew there were lots of companies 'off the telly' who would help them.
So BTE insurers have been seeing a drop in income. But the worst is yet to come....
When the Jackson reforms come into force in April, there will also be a ban on referral fees. Immediately the BTE insurer's business model will have to be junked. No longer will they be able to go after claims and then sell them on but instead they may be keeping their heads down for a change. The only option for the larger ones will be to take over a solicitor's firm and run cases in-house for the legal fees. Trouble with this of course is that the fees a solicitor can generate are also likely soon to be slashed.
Only one thing for it then - put up the cost of the BTE policy to a true 'burn cost' figure (who knows what that would be - I doubt many of them will know either!). Oh dear, bad move - we are in a recession. If the take up of BTE is going down now, just think what is going to happen when the referral fee ban comes in and premiums have to rise two or three fold.
If you have shares in a BTE insurer, sell them now. They are in for a rough ride.