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Rob Cummings speech at the Manchester Law Society Autumn Personal Injury Conference

11/11/2013

The insurer's view

[Check Against Delivery] 

Before I start, I know a number of you will have heard the ABI speak at events before and will notice that I am not James Dalton. Unfortunately James couldn’t make it today, something to do with a mugging and claimant lawyers. 

But I’m here. And I have been asked to speak about the insurance industry’s view of the changes to the personal injury market over the past year. That’s a broad remit but I wanted to say a few works about the changes that have occurred over the past 12 months or so, the industry’s view on what is currently happening and what the future looks like for the personal injury market and motor insurance.

Change in the legal environment

This year has seen fundamental change in the legal environment. April saw the introduction of some of the most significant changes to the civil litigation framework that we have seen for some time. The Legal Aid, Sentencing and Punishment of Offenders Act (LASPO) 2012 came into force, bringing long awaited and much needed reform.

As you know, many of the changes introduced by the Act resulted from the carefully considered recommendations of Lord Justice Jackson’s review of the costs of civil litigation.

The ABI has long supported both the integrated and holistic implementation of the Jackson reforms and the LASPO legislation. By reforming the “no win no fee” system and the “have a go” compensation culture it encourages, important behavioural changes have been introduced into the system. LASPO’s full impact is still being worked out. The Act has only been in force just over seven months and many in the market are still adjusting to the new world it has introduced.

Referral fees

One of the most hotly debated areas of LASPO was the ban on referral fees. There is no getting away from the fact that it was a major self-inflicted blow for insurers to participate in a personal injury claims market involving a merry-go-round of referral fees and other unnecessary costs. Even more so when referral fees merely served to increase personal injury claims frequency, particularly for whiplash, which insurers have so often highlighted as a key factor resulting in increasing premiums.

This has fundamentally shaken consumer, media and political confidence in motor insurers. And that is why the ABI made the case, provided the evidence and supported the Government banning referral fees.
Given the financial rewards that were to be had from referral fees, it comes as little surprise that people across the market continue to look at new and innovative schemes; or whether there are gaps in the law or between regulators, to get around the ban.

People should be asking themselves, not whether these practices are within the letter of the law, but whether they are in the spirit of the LASPO reforms. The government banned referral fees not to stop honest claimant lawyers from marketing their services but to stop the increasing number of frivolous and exaggerated personal injury claims. That means it’s imperative that any new systems put in place do not revert back to the bad old days. 

Reduction in the fixed costs and exemption to the portal

Of course, the other major reforms were those to the Portal. Fixed costs were reduced and the Portal’s scope extended to cover EL and PL claims and all claims up to £25,000.

Despite the headlines in the Gazette suggesting some conspiracy theory, the Government recognised the negative impact that excessive legal fees were having on premiums for hard-pressed motorists. We made the case for reform, supplied robust evidence and the Government took action on what was clearly an unsustainable system. Analysis not anecdotes wins policy debates.

Impact of changes

So, clearly there has been much change of late. But what has been the impact on claims and car insurance premiums? 

Portal figures show the number of claims has fallen since the implementation of LASPO in April. But it is far from certain that this is an established pattern or that it will be sustained if it is. It was no surprise that there was a 30% increase in claims through the Portal in March and April compared to the same period in 2012.

And that needs to be remembered when considering annual claims numbers overall rather than simply claims numbers in the post-LASPO environment. 

And although claims frequency may be going down, the cost of claims has not seen a corresponding reduction. Fixed fees have reduced but at the same time as awards for general damages have increased. The Judicial College Guidelines and the Simmons v Castle decision have together driven up general damages awards by around 20%. Insurers are also reporting significant increases in the number of rehab referrals and psychiatric reports since the reduction in fixed fees was introduced. Overall then, there has been a substantial increase in claims costs.

Now, the question on everyone’s lips is what has all this meant for premiums? 

The industry made a very public commitment at the Prime Ministerial insurance summit. That commitment was to pass on costs savings to consumers from the reforms to the civil litigation system.

And the industry has clearly been delivering on that commitment. The AA’s Premium index shows that the average quoted premium reduced by 5.4% in Q3 this year and 12% over the past year.

Further evidence can be found in the latest Confused.com/Towers Watson Car Insurance Price Index. This showed that the average premium fell by 3.9% in the second quarter of 2013 and 13.9% over the last 12 months.

But dig a little deeper. What is more interesting is looking at regional variations and particularly at those areas where CMCs have been particularly active.  Typically, these saw above average quarterly premium reductions. Notably Manchester/Merseyside for example saw a 6.7% fall in the average car insurance premium in the past quarter. Good news for the locals here today looking to renew their car insurance soon.

So, the key question shouldn’t be whether insurers are living up to their commitments. The evidence is clear. Arguably, the more important question is whether, without effective action to tackle whiplash claims, are these premium reductions sustainable? Or, put another way, are there further premium reductions to be enjoyed by consumers if the Government keeps up the momentum of reform?

What is happening now?

The Government recognised the significant problem that exaggerated and fraudulent whiplash claims represent. Particularly the £90 that whiplash claims add to the average motor insurance premium. This is why the Government committed to working with the industry to help tackle the problem.
As you will be aware, in response to this commitment, the Ministry of Justice consulted on two proposed reforms earlier in the year. One was to increase the small claims track limit from £1,000 to £5,000 and the other was to reform the medico-legal reporting system. 

The government’s recently published response concluded that, while there was a strong argument for increasing the SCT limit, there was still further work to do to ensure robust safeguards are in place.

The Government is right to highlight the strong case for increasing the SCT. The current limit of £1,000 was set in 1991, when 50% of personal injury claims fell within its jurisdiction. Now fewer than 9% do.

The ABI agrees with the Government that it would not be right to have a system in which access to justice for genuinely injured claimants is undermined. We believe that it is important to introduce safeguards for claimants. So in conjunction with an SCT limit increased to £5,000, we would like to see 3 key changes:

Firstly, improved education and awareness so that claimants know how to file a claim for compensation in the new system and what their rights are.

Secondly, the mandatory use by claimant and defendant representatives of independently regulated software based damages calibration tools to assess general damages awards. This will ensure that claimants are always provided with the compensation that they deserve. This should be based on all settled claims – not just court awards. After all, it should reflect what actually happens in the real world. With the benefit of independent legal advice, claimants are settling for what they think their case is worth. So that’s a vital part of the overall picture and needs to be incorporated into any damages calibration tool.

Thirdly, a small number of staff to be employed by the Portal (not the Government) to process paper based claims from those who are not able to file a claims notification form online, e.g. for those without access to the internet.

We are also being proactive to ensure other safeguards are in place in the wider claims environment. We are currently looking to strengthen the Code of Practice on Third Party Assistance. This is a voluntary, self-imposed good practice guide for insurers who are dealing with unrepresented claimants. It supplements existing regulation.

In the context of the challenges posed by the new legal environment, we recognise that as an industry we need to make sure consumers remain adequately protected. So we are undertaking a piece of work to ensure that the existing Code remains appropriate. And we are investigating whether we can go further. We will make announcements on the results of that work soon. 

So while the government has decided that the time isn’t right to increase the SCT limit, the insurance industry remains committed to ensuring that the necessary safeguards are in place. And that commitment is not in hollow words or distasteful advertising campaigns. It is in tangible and concrete action.

Medical evidence

The area where the government did decide to go ahead with reform is with the medico-legal reporting system. I’m not going to stand here and tar all doctors with the same brush. But for too long there have been a number of bad apples producing huge numbers of medical reports that are simply not fit for purpose.
In their response, the Government recognised that a number of medical reports are of poor quality. That there is a need to improve standards. And that there needs to be an end to any real or perceived financial incentive for doctors to produce a particular clinical finding.

There is much detail of the new medico-legal system to be worked through. But there is a broad consensus on what the key features of a new system should be. These include:

  • Independence of those producing the medical reports 
  • A structured and compulsory accreditation process
  • Standardised medical reports and instructions 
  • An element of peer review
  • Fixed costs for the medical reports produced

The ABI has been working collaboratively with other forward-thinking and pragmatic organisations, including MASS, AMRO and FOIL, to flesh out what some of these features may look like in reality. We knew that we would never agree on what should happen to the SCT limit. But we were able to come to together to understand where there was agreement. And we put forward solutions. Solutions which put the consumer at the heart of the system, not our individual members.

There is still much more to be done.  The ABI has been, is and always will be willing to work collaboratively with other organisations. But those organisations need to accept that we won’t always agree. They need to put aside petty name calling. And they need to work constructively to produce good outcomes for the consumer.

Pre-med offers

As a forward-thinking organisation, part of the ABI’s role is to ask our members some really difficult and uncomfortable questions. We don’t pretend that the blame for the problems in the current system all lies elsewhere. That is why we made the case to ban referral fees. They were part of the problem, not the solution. And there is more that the industry can do.

One of the conversations we are currently having with our members is on the practice of pre-med offers. The Government indicated in their response that they are not in favour of them. The ABI has for some time been having this discussion with our members. And I have little doubt that a number of you will have experienced an insurer making a pre-med offer on a claim which wasn’t a low-value whiplash claim.

But I’m not here to talk about individual cases. The vast majority of pre-med offers are for low-value whiplash claims. Some insurers rightly question the benefits of asking for a medical report on an injury which has no objective test, which has little chance of coming back with a negative diagnosis and which will add over 10% to the cost of the claim. Even more so when a number of these reports are for claims that could be months, if not years, after the accident. And where the doctor has nothing more to go on than the subjective word of the claimant.

That being said, as an industry we recognise that we need to play our part in helping to tackle the whiplash problem. As such, the industry is willing to consider stopping pre-med offers if we can ensure that the reforms to the medico-legal system introduce a greater degree of rigour. And that the fee for the report is incorporated into the Civil Procedure Rules.

If the reforms to the medico-legal reporting framework are not introduced properly or are watered down to protected vested interests, simply banning pre-med offers will achieve little. In fact, it would only serve to add additional costs for personal injury claims which would ultimately lead to increased premiums.

Where are we going?

So, what does the future look like? As I have said, there is still much to do on the medico-legal reporting front. And much to do to ensure that the appropriate safeguards are in place for a future increase in the SCT.
The question is, in the absence of further meaningful reform, are the substantial premium reductions that consumers have enjoyed this year sustainable over the medium term?

Much has been said about whether insurers have over-assessed the longer-term impact of LASPO and reduced fixed fees. Even more so in an environment where general damages awards have gone up significantly. It is too early to tell what this might mean for premiums in the longer term but, nevertheless, more can, and should, be done.

Conclusion

In conclusion, significant change is under way and the civil litigation landscape will continue to evolve. The ability to make the system more efficient and more effective is an opportunity not to be missed. Consumers expect all of us working in the market to deliver them the best outcomes at a proportionate cost.

We need to continue to improve behaviours and strip unnecessary costs out of the system. In an environment where the cost of living continues to rise, consumers will see the benefits of continuing reform through lower car insurance premiums.

So thank you once again to Karen for the opportunity to be with you today, and I look forward to the panel discussions later this morning.

Thank you.


Last updated 01/07/2016