Motor insurance myth hits the crash barrier

The demise of the knock-for-knock agreement has not dented insurers' profits as much as they feared. By Nigel Richardson

Much has been said and written over many years about the motor insurers' knock-for- knock agreement, much of it untrue, often by motorists who had little understanding of how it worked or how it applied to them. The one feature always common to any debate on the subject was the insistence by insurers that the agreement worked in the best interests of the majority of motorists in that it helped to keep their premiums low. Even I was persuaded this was the case and have been known to use the argument in its support. It is only now, following the withdrawal of the agreement, that insurers have discovered how untrue this argument had become.

The knock-for-knock was simply an agreement between most motor insurance companies and Lloyd's syndicates. If their clients were involved in an accident they would avoid considerable litigation expense and delay in settling by paying their own client's damage claim, if covered by the policy, without seeking any recovery from the negligent party or their insurer.

The agreement worked reasonably well in the days of the old tariff companies, a tariff that required members to charge exactly the same premium. The tariff had the effect of producing similar client bases for participating insurers, especially the ratio of comprehensive to non-comprehensive policies. This was crucial for the success of the agreement as it relied on the belief that over a number of claims the insurers' liability aspect would be evened out, very much a case of swings and roundabouts.

Such an agreement between insurers would have gone unnoticed by clients had it not been for the no claims bonus. Insurers have always been careful to emphasise that it is a no claims bonus not a no blame bonus. Far too often insurers would delete the bonus if they had settled the claim under the agreement, whereas it should still have been allowed if their client was not to blame.

The maximum permitted bonus under the tariff system was at one stage only 10 per cent (and protected no claims bonuses had not even been thought of) so some clients, happy that the claim had been paid, did not argue. To others, however, it was like showing a red rag to a bull. lt was not so much the extra premium that annoyed them as the damage to their pride. How dare an insurer imply their driving skills were suspect?

Those that did complain were generally told to establish they were not to blame. lt was not, after all, in the interest of the insurer to establish liability as by doing so they could lose 10 per cent of the next premium. It is not surprising that motorists took such a dislike to the agreement despite being told it worked in their best interest.

Had the agreement been applied correctly as far as bonus was concerned their clients would never have known of its existence. Those who took the wise decision to insure through a broker generally fared better. Generally unknown to them their broker would have pressed the insurer into allowing the bonus where it was justified in doing so.

Certainly there was a period in my own career where one of my key tasks was to broke renewals where there had been claims. Frequently I was successful in persuading reluctant insurers to allow the no claims bonus where the claim had been dealt with under the agreement. Merely a study of the circumstances of the incident and the nature of damage to the insured vehicle was generally sufficient to determine liability.

The tariff system itself and the knock-for- knock concept collapsed under the impact of competition from new insurers who refused to be party to any trade agreements. This provided them the freedom to target preferred classes of business, the result being that over a number of years insurers built differing profiles of business, in particular the ratio of comprehensive to non- comprehensive clients.

The main weakness of the old knock-for-knock became evident; it had led to comprehensive clients subsidising those who opted for reduced cover, while insurers with mainly comprehensive clients were in turn subsidising those who wrote mainly third party business.

To illustrate the problem take the incident where a motorist insured for third party is negligent in colliding with a motorist insured comprehensively. The third party insurer pays nothing to their client, the comprehensive insurer settles his client's claim and is unable to make a recovery from the negligent driver's insurer because of the agreement. Had the liability been the other way around the comprehensive insurer would have had to pay the cost of the damage to both vehicles. So the comprehensive insurer was always having to pay his own damage and in addition the damage to any third party vehicle where their policyholder was negligent. Meanwhile the third party insurer never paid any accidental damage except maybe under an uninsured loss claim.

Once a predominately comprehensive insurer had finally taken the bold step of cancelling their knock-for-knock agreements they were often surprised to find that they were actually recovering the majority of the accidental damage payments they were making to their clients without any appreciable cost in doing so. Those insurers who favoured third party risks were obviously not so keen to end an agreement that had been highly profitable for them. They were now having to pay their policyholders' correct share of the overall claims costs.

The result has been a rating change that is now far fairer to the majority of motorists, those that purchase comprehensive cover. Under the agreement third party premiums were only about half of the equivalent comprehensive rate. Today that has risen to around 75 per cent. The change has been achieved as much by comprehensive premiums falling as by any increase in the third party rates.

Any other change? Well yes, surprise surprise, predominantly third party insurers are now looking for a more balanced account by attempting to attract more comprehensive clients and comprehensive insurers are more inclined to consider limited cover policies now that premiums for them have risen.

So are we seeing the beginning of a return to the days of the old tariff where large insurers all write similar portfolios of business? Perhaps that is wishful thinking in a market dominated by a lust for market share rather than any sound or logical underwriting practice. But at least the myth about the agreement acting in the best interest of the motorist has at last been laid to rest.

Nigel Richardson is motor schemes manager at the RAC