Knock for Knock agreements; a roadblock to foreign insurer profitability

While a foreign concept to many Americans, knock for knock agreements are quite common in a number of overseas insurance markets.   Generally limited to auto accidents, these agreements bind insurance companies to take care of damages incurred by their insured’s when involved involved in accidents with other compact members. 

In a sense, knock for knock agreements bare some resemblance to true no-fault laws, such as those found in Michigan, whereby responsibility for reparations falls to individual insurers regardless of fault and type of loss.   

Unlike laws in true no-fault jurisdictions, these agreements generally aren’t statutory and often do more harm than good.   The rationale is economic and administrative efficiency.  While an insurer may be able to pursue a recovery from the party responsible for an accident or from its policy-holder, this is perceived to be a costly administrative procedure. The knock-for-knock agreement simplifies recovery claims among insurers and, over time, theoretically attributes costs fairly among insurers.

However, knock-for-knock agreements between insurers have been criticized as unfair on the party not responsible for an accident. If, for the sake of administrative ease, an insurer pays out to repair damage done to its policy-holder’s own car instead of pursuing the party responsible for the accident for all relevant costs, an effective claim is recorded against that policy-holder’s insurance record. In this way, knock-for-knock agreements can result in policy-holders’ finding unexpectedly, when they come to renew their insurance, that they face higher premiums regardless of responsibility for an accident in which they were involved.

In many foreign countries, market segmentation isn’t nearly as defined as it is in the United States.   For example, a knock for knock agreement in America between a non standard and standard insurance carrier would be very detrimental to the latter.   Given the disproportionate number of accidents by non standard risks, the standard drivers would sustain increased out of pocket losses, such as deductibles and higher premiums.   As market segmentation evolves overseas, this is likely to expose significant flaws in knock for knock agreements.  

Arguably a better model would entail a fundamental understanding of the subrogation process.   By developing a claims organization that utilizes  cutting edge workflows and processes, carriers who opt out of knock for knock agreements stand to gain a significant competitive edge in the marketplace.  

Santam, a leading South African insurance carrier, terminated their participation in the Knock for Knock Agreement in that nation.   In their news release, the carrier stated,  “With increased emphasis on profitability and cost containment, the debate regarding the excess has become fiercer and has often frustrated policyholders.  Santam’s decision was based on the fact that the Knock-for-Knock Agreement is outdated and did not stay abreast of developments in the insurance industry.  Our view is that Santam can serve its clients better without this agreement.”

While these types of agreements still abound in many nations, the reality is that carrier’s looking to improve profitability, increase retention and gain market share will likely to the same conclusion as Santam.  As discussed in my book, Re-Adjusted: 20 Essential Rules To Take Your Claims Organization From Ordinary to Extraordinary,  a far better road to success is that of implementing an end to end process that is second to none will serve as the springboard to handle claims better, faster and more accurately than the competion.    

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Christopher Tidball is a claims consultant and author of Re-Adjusted: 20 Essential Rules To Take Your Claims Organization From Ordinary to Extraordinary.   He spent more than than twenty years in various claims, process and executive roles with multiple leading insurance carriers, developing innovative solutions to improve all aspects of the claims process.  To learn more, please visit www.christidball.com or e-mail chris@christidball.com.