Brokers face income hit after Ministry of Justice closes CMCs

The Ministry of Justice (MoJ) shut down 734 claims management companies (CMCs) in 2011, according to recently released figures.

This represents almost one fifth of the total number of CMCs that were operating in the UK at the beginning of last year, a sizeable chunk of a market by anyone’s standards. Clearly, the claims management industry is not having an easy time of it at the moment.

“Obviously there are different types of CMCs,” said Chris Shaw, commercial director at Ai Claims Solutions.

“A lot just act as middle men and don’t really add any value.”

These, according to Mr Shaw, are the firms that have already felt the full force of a “tougher market”.

“We have not seen any big casualties,” he said, but added that this would not be the case for much longer.

The current situation for many CMCs is an obligation to “fight” to get to the customer and, with the price of fuel and insurance rising, the number of these potential clients could fall even further. “Very soon we are going to see a significant reduction in the number of accidents occurring,” predicted Mr Shaw. “It’s challenging.”

This challenge could well have repercussions for the broker market. Many firms now rely on referral fees from claims companies for a considerable chunk of their income, so with falling competition in the claims management space, brokers may face a significant financial loss and have to think very carefully about how they generate income.

And it seems the brokers that stand to lose most as a result of closing CMCs are the smaller, newer firms.

One broker, who did not wish to be named, described the CMC sector as “a lot of smoke and mirrors” and pointed out that the majority of the more “traditional” brokers had steered clear of engaging with such companies.

Ian Gosden, managing director of Higos Insurance Services, agreed: “As a broker we are paid to look after our customers’ claims.

“I don’t understand why, having taken the client’s business, we wouldn’t support them should they have a claim.”

However, he conceded that many brokers would need to rethink their income model, and added: “I think there are going to be one or two brokers that will have to increase their rates.”

Many feel that CMCs will always find a way to survive, and bringing legal teams within a company could be one way to pass on referral fees when the ban on such practises comes into effect.

Mr Gosden predicted something similar to this for insurance intermediaries who might otherwise suffer from a lack of CMC-generated revenue.

“I’m sure there are brokers who will bring it all in-house – they will set up their own legal practices,” he predicted.

And for this reason, he said, it is becoming more and more important that the government “change the rules so money cannot be made out of these whiplash claims”.

The message coming from both sides of the market appears to be that the government must step in and do something. In the form of the Ministry of Justice it already has, but clearly some believe it has not yet done enough.

Brokers will be watching the developments closely as some could be left exposed to extensive loss of income. They will not get everyone’s sympathy, but such brokers should prepare at least to take action themselves to come up with ways to replace the funding stream previously generated by CMCs.

(Image: © James Boardman/Alamy)