There is a consensus that claims costs need controlling but the industry can't agree how. Michael Faulkner reports
Last month, a woman received £500,000 compensation from the supermarket chain Asda after she injured her hip, slipping on a mushroom. An excessive amount? Asda clearly thought not. Had the case gone to trial, the legal costs alone could easily have matched this amount.
And this case is not unusual. In fact it is just one of the 1.8 million personal injury claims that are made each year in the UK. And the number is rising.
The cost of these claims is staggering. The Institute of Actuaries estimates that the total cost of compensation in the UK amounts to over £10bn, around 1% of GDP. It argues that this cost has been increasing at 15% a year and is set to continue rising at over 10% a year.
If this is not enough to make insurers quake in their boots, the actuaries make a rather apocalyptic conclusion: if this trend goes unchecked, the insurance industry could face meltdown. Scaremongering it may be, but there is consensus that the industry simply cannot sustain these levels of losses.
AXA casualty insurance manager David Williams says that the unpredictability of the constant rise in claims cost is a danger. "It is becoming impossible to accurately price on the current basis. This suggests that if you cannot assess the cost, you cannot insure. The current employers' liability (EL) crisis is symptomatic of this problem."
And while insurers wrestle with problems of reserving and pricing, consumers are faced with ever higher premiums and for some there is the spectre of no insurance cover whatsoever.
This is an issue that affects everyone.
The reasons for the rising number of claims are well rehearsed. The concept of the right to compensation has become embedded in the nation's psyche. Television programmes such as Watchdog have fuelled a righteous culture, and the arrival of claims farming companies, such as the ill-fated Claims Direct, has cultivated the perception that injury and compensation go hand-in-hand.
Legal changes also bear some of the responsibility. The abolition of legal aid and the consequent birth of no-win, no-fee schemes have made litigation a no-risk venture for the aggrieved party.
But there is some debate over the extent to which a UK compensation culture exists.
Bar Council chairman Matthias Kelly says that a lot of it has been hyped by the media. And law firm Anthony Gold partner David Marshall says that the media has ignored much of the research arguing against a US-style claims culture.
Marshall, who is vice-president of the Association of Personal Injury Lawyers, cites a report by independent analyst Datamonitor. It found that the number of injury claims fell in 2001. And it forecast just a 2.1% increase in the number of claims by 2007.
Claims levels
A report published in 2002 by actuary Tillinghast-Towers Perrin found that in 1998 the UK had the lowest "tort cost expressed as a percentage of GDP" in the industrialised world - only 0.6% compared to the US (1.9%), France (0.8%), Japan (0.8%), Canada (0.8%), Australia (1.1%), Germany (1.3%) and Italy (1.7%).
The study also found that in 1994 the UK percentage was 0.8% so the comparable UK figure has, in fact, fallen.
Even insurers, who are usually the first to cry "claims culture" have been experiencing surprising changes in the levels of claim. Zurich, for instance, has found that the number of EL and public liability claims fell from 1997 to 2000. And AXA found that its figures also fell during 2000-2001.
But AXA experienced a 30% increase in the number of small claims last year. And Allianz Cornhill has found that, while the number of motor accidents decreased, in each case on average 1.5 people are claiming, whereas previously only one claim would be made.
While frequency is falling, it seems that the cost of claims is increasing. Awards of damages are rising following various technical changes in the way damages are calculated, coupled with a realisation from the courts that awards in general are too low. Legal costs are also increasing despite the intention of the Woolf Reforms to make litigation cheaper.
Zurich has seen the average cost of personal injury claims rise by 10% a year over the past five years - an experience that is mirrored by the rest of the market. A survey of leading insurers by Datamonitor found that the average cost of a motor claim payout rose by 28% in 2001-2002, while the average EL payout grew by 18% in the same period. Datamonitor predicts that personal injury claims costs will rocket by a staggering 200% by 2007.
But what can practicably be done to tackle the problem?
Reducing the number of claims being made in the first place is one of the most important things that insurers can do, says Royal & SunAlliance technical insurance manager Phil Bell. And to this end insurers have become very focused on improving the health and safety and risk management practices of their policyholders.
Bell also says that insurers need to be in a position to defend claims better if they do arise, by encouraging companies to keep better health and safety records and notify potential incidents promptly.
Brokers play a vital role in assisting these practices. But insurers also need to focus on reducing the size of any successful claim. Rehabilitation programmes can help to expedite an injured person's recovery, and alternative dispute resolution, such as mediation, can provide less costly alternatives to litigation.
However, arguably the biggest area of concern for insurers is that of legal costs. Studies have found that over a third of the total cost of compensation goes in legal expenses. The Institute of Actuaries has described this as a "fundamentally inefficient" way of delivering compensation.
Legislative change
A number of test cases are before the courts and insurers are waiting anxiously for the decisions.
But critics say that leaving the matter to the courts will simply perpetuate the uncertainty and fail to control spiralling costs. Calls for legislative change echo round the industry and the courts.
But while any drastic changes look unlikely, solace may be found in a proposed fixed-cost system.
Weightman Vizards best practice partner Laura Wilkin warns that the industry must ensure that such as system works. Insurers also need to become more proactive in identifying forthcoming legal issues or risk being marginalised in important debate, she says.
But claims consultant Bev Fitzgerald believes that insurers are simply using lawyers too much. "Insurers have become too focused on service and have lost sight of the claims process. As a result, it has become the norm to send claims straight to lawyers.
"But a lot of claims could be settled by insurers with in-house claims staff and loss adjusters and should not reach lawyers."
Technology plays an important role in all the above areas, from improving the speed of notification to more effective management of the claims handling process to achieve quick, cost-effective settlements. It is also a vital tool in the battle against insurance fraud.
Ultimately, there are many avenues open to insurers to combat the relentless march of claims costs. The industry is switched on to risk management, but more needs to be done to bring mediation into the mainstream.
Moreover, insurers cannot sit back and hope that the civil justice system will do them any favours.
They need to make their voices heard and ensure that they take maximum advantage of any lifelines offered, such as fixed costs.
Health and safety: incentives and controls
Improving health and safety and risk management practices is key to reducing the number of claims.
Insurers are increasing their risk management resources. Zurich claims director Joe Robinson says that Zurich Risk Services has over 615 risk and inspection specialists providing risk management services to companies nationwide. And AXA casualty insurance manager David Williams says that AXA has recently tripled its risk surveyors.
The problem is that limitations of time and resources mean that insurers are unable to survey the many thousands of risks on their books. So they look for other ways to promote the information.
AXA, for example, has a website, www.axa4business.co.uk which allows businesses to download detailed guidance on various aspects of health and safety. It is also currently in discussion with the Federation of Small Businesses to develop other online health and safety solutions.
Brokers play a vital role in educating clients on risk management. Williams says that AXA provides risk management education to their Premier brokers through a software package.
But do the initiatives work? Robinson is convinced of their effectiveness. "Health and safety initiatives do work in both the prevention of accidents and the repudiation of claims. But for such schemes to work, all stakeholders - employers, customers and shareholders - must be targeted. The key is having a better understanding of the risks and implementing the most appropriate controls."
But Williams says that hard evidence is elusive. "We haven't been able to measure the impact of these programmes, and it is difficult to build a business case to justify them."
Nevertheless, statistics suggest some positive impact. Allianz Cornhill divisional claims manager Roy Hebburn says that motor claims frequency is reducing. And the fall in the number of workplace accidents may also be testament to the success of such schemes.
But are there other ways to encourage better health and safety practices?
The HSE argues, in a paper entitled Changing Business Behaviour, that UK employers would be better motivated if the cost of insurance were increased and if they could see a link between their performance and cost of insurance.
The authors reviewed foreign (workers' compensation) schemes and found that premium discounts and rebate schemes could positively influence the management of occupational health and safety. And for this to happen, the cost of insurance needs to be high, at no more than 3% of payroll, and discounts must also be high, at 25% of normal premium.
Could these findings assist UK insurers?
Williams is sceptical. "It is difficult to give discounts for good health and safety as, without basic practices in place, businesses wouldn't even be able to get cover. Often, it is a matter of reducing the ratings increase rather than giving a discount. We need to look at a way to give discounts to those with the right attitude to health and safety."
And the report acknowledges that many UK insurers already claim to operate some of the mechanisms suggested by overseas practices, as far as possible.
Six ways of controlling claims: how they rate
Risk management
Reducing the number of accidents occurring is a logical step to take to reduce claims costs. But insurers have been talking about risk management for years and claims costs are still rising.
Rehabilitation
Proponents say that it benefits all parties: the injured person can return to work quicker and it reduces damages claims for loss of earnings. But critics argue that long-term benefits are unproven. There is also some resistance from claimants and their solicitors.
Mediation
It can reduce claims cost by 50% and can be arranged quickly. Telephone and online mediation is developing. But it is seen as an expensive way to settle small claims, and claimants and their lawyers like their day in court. Needs wider acceptance.
Legislative reform of legal costs
It would remove a system which critics argue is fundamentally inefficient, complicated, unfair and costly. But it is a potentially dangerous step, given the problems surrounding the last set of reforms: whether a new system would be any better is uncertain. Also very unlikely to happen.
Fixed legal costs
It has the potential significantly to reduce the current cost burden and increase certainty for insurers. But claimant solicitors may seek to avoid the system by inflating claims, issuing proceedings earlier and using opt-out clauses.
Improving claims management
Has wide-ranging cost-saving benefits, but infrastructure and technology issues may prove to be stumbling blocks.
Mediation: overcoming resistance
Mediation is a form of alternative dispute resolution (ADR) that has been embraced by the Woolf Reforms. Essentially, it involves bringing the parties together before a trained mediator. It is a voluntary, confidential and informal process. It also has considerable potential to reduce claims costs, says Crutes Law Firm senior partner Tim Wallis.
Estimates vary over cost savings that can be achieved, but experts suggest 30% to 50%. In addition to cost savings there are other advantages. According to Wallis, a mediation can be set up within a week and 85% of cases will settle on the day.
Yet despite the apparent appeal, only a minority of claims are resolved through mediation: Bill Radcliffe of solicitors Weightman Vizards estimates that only 30% to 40% of cases utilise it.
So why has the insurance industry been so slow to embrace ADR?
Wallis says that there is a perception that it is an expensive way of settling what are considered to be relatively straightforward claims.
But while it may not be cost-effective for small claims at present, he says, for other cases the savings in time and court costs can more than outweigh the expense of the mediation itself.
And as telephone and online mediations become more accepted, its use will become wider.
Radcliffe also points out that there is resistance among lawyers themselves to using the process.
But there are positive signs. Wallis says: "There have been a number of cases where the courts are turning the screws on litigants and threatening costs sanctions when ADR is not used."
DLA partner Alan Jacobs says that the growing importance to insurers of client relationship management will necessitate greater use of mediation.
"With the claims arena dominated by service, clients are becoming more sensitive to the larger, more complex claims.
"A perfect example would be a large insured that is heavily unionised with a heavy employers' liability premium.
"The insurer should set up a scheme with the union's lawyers where mediation is the only form of claims negotiation."
But even when insurers are switched on to the benefits of mediation, claimants themselves can prove to be the stumbling block, says AXA casualty insurance manager David Williams.
"The view of the public is that we are trying to shaft them if we stop them from having their day in court by offering mediation."
Rehabilitation: scant evidence of success
Despite industry scepticism, Zurich claims director Joe Robinson is convinced of the benefits of rehabilitation: "Loss of earnings is a big part of claims costs. So it is important to get people back to work as soon as possible.
Other insurers also actively support such schemes. Allianz Cornhill has a programme for the treatment of whiplash injuries, which divisional claims manager Roy Hebburn says makes up 80% to 90% of all motor claims. Others insurers, such as Royal & SunAlliance (R&SA) and AXA, also offer rehabilitation solutions.
But despite its apparent advantages, insurers are not succeeding in placing claimants in the schemes: Hebburn quotes a figure of less than 10% for the whiplash programme. And research by the London International Reinsurance Market Association revealed that in the UK only 10% of people return to work following serious injury, compared to 30% in the US and 50% in Scandinavia.
Hebburn says that the problem is breaking down the adversarial barrier. The nature of the civil justice system means that insurers do not always know of the claim early enough and claimants' lawyers are often unco-operative.
AXA casualty insurance manager David Williams also says that there is a misconception that rehabilitation is suitable only for large losses which has the unfortunate side-effect of reducing its use.
And lawyers' success fees also tend to discourage use of rehabilitation, says Williams. "They want to get the highest award possible."
A further hurdle to the more widespread use of rehabilitation is that its success is largely unproven. R&SA technical insurance manager Phil Bell says: "Most people instinctively think it is a good idea, but there has been no evidence over a sufficient period of time to judge the benefits."
The ABU and the TUC last month set out an action plan to promote rehabilitation. The main points are; to replace adversarial elements of the compensation system with a partnership approach, to engage with government to build a sustainable rehabilitation infrastructure and to conduct research.
Technology: speedier notification and processing
Insurers are increasingly looking at ways to speed up the notification of claims. This is where claims processing systems can help to control costs. They enable an investigation process to start early while the matter is still fresh and provide an environment for cost-saving early settlements.
Allianz Cornhill, for example, operates a telephone notification system for motor claims. Claim forms are no longer accepted and divisional claims manager Roy Hebburn says that this has been invaluable in reducing cost.
"On average, it took 26 days for claims to be reported by claim form. This has now been reduced significantly," he says.
Zurich claims director Joe Robinson says that electronic notification will be the way forward. "In the main, third parties, such as solicitors and accident management companies, provide the notification. The key to an effective process will be the availability of system-to-system technology, supported by consistent data and information."
Damage evaluation technology is also going to be an essential tool. Disaster recovery specialist ISS Ark & General has introduced an IT system which allows project mangers to get all the relevant information and images to the insurance company and the loss adjuster within hours of a disaster.
And technology is also providing new ways of combating fraud - estimated to cost the insurance industry £1bn a year.
IBM head of general insurance products Imran Ahmed says that there is a new generation of technologies that allows insurers to determine what a normal claim would 'look' like and which then allows them to monitor any deviations from this norm.
Legal costs: a mess, but hopes of minor reform
Zurich estimates that 40% of claims costs are attributable to the legal system. For small claims, the position is even worse: AXA estimates that for claims under £5,000 legal costs amount to 95% of the total court award.
Conditional fee arrangements (CFA) and after-the-event (ATE) insurance premiums are adding to legal costs. Since April 2000, the successful claimant has been able to recover these from the defendant, thereby placing a significant cost burden on insurers.
The operation of CFAs and the level of recoverable success fees and ATE premiums are still the subject of much litigation. Insurers are hoping that the decisions will see the courts bring the levels of recoverable costs under control and provide some clarity.
But recent court decisions have not had the direction required from the Lord Chancellor's Department, according to Zurich claims director Joe Robinson.
So should a more radical solution be sought? AXA casualty insurance manager David Williams certainly thinks so: "Someone needs to come in with a dustpan and brush, clean up the mess and set out some proper rules that don't send costs spiralling out of control."
And he is not alone in his view: other insurers and lawyers are equally critical. Chairman of the Bar Council conditional fee panel Nigel Cooksley QC believes that an overhaul of the system is needed.
"A log-jam has arisen between defendant insurers and claimant solicitors. Legislative reform is needed to rectify this, he says. "The problems are endless with CFAs: it's a dreadful system, horrendously complicated, administratively burdensome and unfair to both claimants and defendants."
It seems that wholesale reform is unlikely, according to Beachcroft Wansbroughs litigation partner Andrew Parker. "We are still trying to sort out the Woolf reforms as it is. Reform is the last thing the government would want."
So what is the solution? One approach is greater use of before-the-event (BTE) insurance, as these policies negate the need for CFAs and ATE premiums. Insurers are starting to use these more and more. Most motor claims are now funded by BTE insurance, says Parker.
But one claims manager says that underwriters don't want to include BTE insurance for fear of upsetting brokers who want to sell the policies separately.
There is one area where there seems to be some agreement. In April a fixed-cost system will be unveiled that will provide a cost structure determined by the level of awarded damages. The scheme, developed by the Civil Justice Council (CJC), will apply to motor claims worth under £10,000 which settle prior to the issue of proceedings. this will cover around 80% of cases.
And Weightman Vizards best practice partner Laura Wilkin warns that the success of fixed fees lies to a great extent in the hands of insurers. It is essential that insurers do all they can to avoid litigation, as only pre-action settlements will enjoy fixed costs, she says.
But Legal Costs Negotiators negotiations manager Simon Gibbs says: "As the rules will be limited to non-issued motor cases where damages settle for under £10,000, it will be an open invitation to claimant solicitors to inflate claims
