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Rob Cummings speech at the Claims Magazine Conference 2014

View from the insurance world

[Check Against Delivery]

I have been asked to provide the view from the insurance world. That’s a broad remit and you will all be aware there is certainly a lot going on at the moment across the industry. I wanted to say a few words about the civil litigation reforms that have occurred over the past year, the industry’s view on what is currently happening in the market and what the wider industry might expect over the next six months.

Change in the legal environment

The civil justice landscape saw fundamental change last year. Last April we saw the introduction of some of the most significant changes to the civil litigation framework that we have seen in a number of years. The Legal Aid, Sentencing and Punishment of Offenders Act (LASPO) 2012 came into force, introducing much needed reform to a dysfunctional system.

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. Reforming the “no win no fee” system and the “have a go” compensation culture it encouraged, has introduced important behavioural changes into the system. Even though the Act has been in place just under a year, many in the market are still adjusting.

One of the concerns that was raised about the reforms was over the potential impact on access to justice.  Although too early to tell its full impact, it appears that there continues to be sufficient capacity in the claimant lawyer market to ensure that access to justice for genuinely injured claimants has not been impeded.

While a few law firms have ceased operations, others have merged which has led to greater economies of scale in the market.  It is more likely that law firm closures are to do with firms failing to adapt sufficiently quickly in the evolving legal market. This is reinforced by the fact that there seems to have been no lack of willing buyers for the PI book of business of those firms that are looking to sell. As a result, the negative impact on access to justice that many claimant solicitors predicted has simply not happened.

Referral fees

Now, one of the most contentious elements of the LASPO Act was the ban on referral fees. It has been said before, and I will say it again, 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, claims 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.

Some have pointed the finger at insurers entering into ABSs as an attempt to get around the ban on referral fees. This does not hold up to scrutiny. Those insurers that have entered into ABSs have done so to provide support to their genuinely injured customers, not to get around the referral fee ban.

But if you don’t accept that, to demonstrate the industry’s commitment to delivering positive consumer outcomes and to ensure that any actions insurers take in the new legal environment lead to a reduction in the number of unmeritorious personal injury claims, the ABI launched a code last month entitled: “Support for Customers with Road Traffic Injuries: The ABI Code”.

The Code aims to ensure that in a fast-changing and regularly-evolving legal environment, the interests of consumers come first – both in accessing compensation and also in making the claims system as cost efficient and effective as possible. Insurers want to give customers and other stakeholders confidence that, in operating in the new civil justice landscape, they are working in the interests of genuinely injured claimants, of the premium paying public and in the wider public good. We believe that the Code achieves this objective. You may not. That’s fine. I look forward to reading your proactively developed, industry Code which promotes consumer protection.

Reduction in the fixed costs and exemption to the portal

Of course, the other major reforms that were introduced were those to the Portal. Fixed recoverable 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 from the Law Society’s Gazette and other claimant bodies, the Government and the insurance industry were not in cahoots. Two Court of Appeal judges found that. The Government recognised the negative impact that excessive legal fees were having on premiums for hard-pressed motorists and consulted not once but twice on what the level of fees should be. And then had to defend their decision in court.

Insurers made the case for reform, supplied robust evidence and the Government took action on what was clearly an unsustainable fee model.  

Impact of changes

Clearly there has been much needed reform introduced over the past year. But the Government’s stated policy objective has been to strip out unnecessary costs and reduce fraudulent personal injury claims, with the overall objective of reducing car insurance premiums while maintaining access to justice for genuine accident claimants.  

So 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 2013 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 - and the overall picture is still unclear - the cost of claims has not seen a corresponding reduction. Fixed fees have reduced but that’s happened 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 increases in the number of rehabilitation and psychiatric referrals since the reduction in fixed fees was introduced. This is an issue the Transport Select Committee are currently looking into.

These reports will often add little value to the claim, as the claimant will often have only suffered a minor soft tissue injury. Furthermore, they can add over £2000 in additional costs, which puts increased pressure on premiums. What’s more, they are often obtained from a medical agency within a claimant law firm’s business structure raising further questions about the report’s necessity.

Impact on premiums

Those of you that follow this sector closely will know that certain claimant law firms and claimant representative bodies have an obsession with the profitability, or otherwise, of motor insurers and have accused the industry of making excessive profits.

With debates such as this, it is always helpful to have independent evidence rather than deliberate misinterpretation of the facts in an effort to score cheap political points. And you don’t get much more independent than the Office of Fair Trading and the Competition Commission. After both bodies carried out comprehensive investigations of the market, both found that motor insurers were not making excessive profits. In fact, they were not making a profit at all.

The ten largest motor insurers provided the Commission with financial data for the five years ending Dec 2012 and the Commission found that, on average motor insurance activities were loss making with a combined operating ratio of 112%. Or put it another way, for every £1 an insurer took in premium income, they paid out £1.12 in claims costs.

I think it is fair to say that the motor insurers are some way off making googlesque type profits! 

It is very easy to throw accusations at insurers, who are mainly publicly listed companies and need to comply with listing rules. It would be interesting to see what would happen if claimant law firms were required to be as transparent, whether people might see that even with the reductions in fixed fees, there are plenty of firms doing very nicely.

But of all this a side issue, what hard-pressed consumers are really worried is reduced car insurance premiums.

The industry made a very public commitment at the Prime Ministerial insurance summit in Feb 2012. 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 ABI launched an average motor insurance premium tracker in January to demonstrate our commitment to transparency on premium rates. The tracker shows that the average premium fell by 9% in the past year.

And if you don’t believe the ABI’s numbers, further evidence of the industry delivering on its commitment can be seen in the Confused.com/Towers Watson premium tracker. Their tracker provides regional variations. In Manchester and Merseyside, areas which had the highest concentration of CMCs prior to LASPO, average comprehensive premiums fell by nearly 7% in the third quarter of 2013 alone.

This figure included the second consecutive double digit quarterly percentage decrease for 17 to 20 year olds living in the region. Drivers in the West Midlands and South Wales, other regions where CMCs had been prevalent pre-LASPO, also enjoyed above average quarterly price decreases.

A key element of pricing insurance is anticipated claims cost and claims frequency. In a highly competitive market, insurers looked to gain an advantage over their competitors by pricing in anticipated future savings, in this instance the reduction in fixed fees following the Government’s commitment to reduce them.

That is why premiums started to fall before the reduction in fixed costs were introduced. However, as the Government has decided to defer any increase in the small claims track and has failed to take action on young drivers, it is questionable whether the premium reductions consumers have enjoyed to date are sustainable.

Robust reform of the medico-legal reporting system has an important role to play but should not be seen as the panacea for delivering further reductions in car insurance premiums. Given that there remains no objective test for whiplash, combined with the number of vested interests in the wider claims industry, the impact of the Government’s proposed reforms to tackle frivolous and exaggerated claims may not be as great as first anticipated.

 

 

What is happening now?

So 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. That is why the Government committed to working with the industry to help tackle the problem and is continuing to do so.

The Ministry of Justice consulted on two proposed reforms last 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 has 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 before an increase can be put 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 recognises that it would not be right to have a system in which access to justice for genuinely injured claimants is undermined, which is why we have always argued that the SCT limit needs to increase along with the introduction of safeguards for claimants. We would welcome the opportunity to work with the Government to help ensure these safeguards are properly introduced.

The fact that the Government has deferred a decision to increase the SCT is a missed opportunity to improve the efficiency and effectiveness of the civil litigation system and further reduce car insurance premiums for customers. But the insurance industry remains committed to ensuring that the necessary safeguards are in place for a much needed future rise, and are working to ensure that these can be implemented when the time comes for the SCT limit to rise.

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 consultation 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. We have a panel session on this today so I won’t go into too much detail now other than to flag that 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 information in medical reports
  • An element of peer review
  • Fixed costs for the medical reports produced

The Ministry of Justice has set challenging timeframes for this work to be completed but timeframes that can be met if forward-thinking and pragmatic organisations like the ABI, MASS, AMRO and FOIL can continue to work together to put forward practical solutions. Solutions which put the consumer at the heart of the system, not the interests of our individual member firms.

Access to CUE PI

Reform to the medico-legal reporting system isn’t the only initiative being taking forward to help tackle fraudulent PI claims. The ABI is in on-going discussions with APIL, MASS and the Law Society about how to facilitate access to CUE PI and we have now agreed, in principle, to share data. We are now working to define how that can happen in practiceand will make announcements in due course.

Pre-med offers

As a forward-thinking organisation, part of the ABI’s role is to ask our members some really challenging and uncomfortable questions.

We don’t pretend that all the issues and faults with the current system lie elsewhere. That is why we made the case to ban referral fees. And there is more that the industry is doing.

One of the conversations we are currently having with our members is the practice of pre-med offers. The Government indicated in their response to their whiplash consultation that they have concerns over the practice.

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 before hands shoot up to give me an example of a particular case you’ve dealt with let me say that the majority of pre-med offers are for low-value whiplash claims and are to represented claimants, who have the benefit of legal advice to understand if accepting the offer is in their best interests. 

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 diagnosis other than for whiplash 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 UK’s whiplash epidemic. As such, the industry could 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.

It is also important to note that claimant lawyers can play a role to. As I said, it is usually represented claimants, not unrepresented claimants, that pre-med offers are made to and more often than not directly at the request of the claimant lawyer. So if claimant lawyers are so keen to end the practice, it would be helpful if they stopped requesting them!

It is important to understand that, 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 to personal injury claims which would ultimately lead to increased premiums.

Where are we going?

So, what does the future look like from an insurer view point? Progress has been made but there remains much to do on the medico-legal reporting front. And there is 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 over the past 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 but, more can, and should, be done to ensure consumers get access to justice and the best priced car insurance.

Conclusion

In conclusion, significant change has been implemented 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 claims 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.


Last updated 01/07/2016