UK financial regulator warns insurers over unfair payouts

The UK’s financial regulator has warned insurers not to undervalue cars and other property when it comes to making payouts to customers.

The Financial Conduct Authority on Friday said it had seen evidence of customers whose cars had been written off in a crash being offered a payout lower than the vehicle’s fair market value. In some cases, insurers increased the offer only when a customer complained.

The insurance industry is battling a rise in the cost of claims as a surge in the price of vehicles and parts erodes its profit margins. The watchdog acknowledged that insurers were under “increasing pressure” but said they should consider the impact of inflation, now in double digits, when offering cash settlements.

“When making an insurance claim, people shouldn’t need to question whether they are being offered the right amount for their written-off car or other goods that they need to replace,” said Sheldon Mills, FCA executive director for consumers and competition.

“This is especially important now as people struggling with the cost of living will be hit in the pocket at precisely the time they can ill-afford it.”

He added that the regulator would “act quickly to stop firms and prevent harm to customers” where it detected unfair activity.

The Association of British Insurers, a trade body, said it would discuss the matter with its members “to understand how processes are kept under review”, including information provided to customers on settlement options.

It added: “Our members have processes in place to determine a fair market value for a written-off car but we agree it’s important that policyholders trust the offer they receive.”

Insurers can offer cash rather than repair or replacement to settle claims such as car write-offs. But the FCA warned that cash might not always be in the customer’s best interest “if they are not able to easily arrange repairs or replace an item themselves, or if inflation means they lose out in real terms”.

The body is introducing a consumer duty, due to take effect for most companies next year, which will require insurers to deliver good outcomes for retail customers, including when they make claims.

The regulator also said companies should “not incentivise their staff to engage in potentially harmful claims settlement practices”.

Duncan Minty, an independent consultant on ethics in insurance, said that warning was particularly concerning. “If they are finding evidence of [such practices], why isn’t that being addressed forcibly and visibly?”

Motor insurers in particular have been affected by a surge in the price of second-hand cars, partly the result of pandemic-fuelled demand and supply constraints on new cars.

Consumers can turn to the Financial Ombudsman Service if they cannot resolve a complaint over a payout with their insurer.