What can we do to contain US-style compensation culture, asks Owen Gorman
The past year has been an interesting and challenging time for liability insurance. The primary cause of the crisis in employers' liability (EL) is caused by "compensationitis" - the increasing number and value of claims being made. Until recently, the compensation culture was regarded as a US phenomenon, but now it has hit the UK. The issue moved Prince Charles to write to the Lord Chancellor recently, to speak of the "dread" he felt about the growth of a personal injury culture in the UK. The letter highlighted the felling of a horse-chestnut tree in Norwich last year, which was apparently motivated by the fear of claims from passers-by being injured by falling conkers.Personal injury claims and inflation also contribute to the new trend. Personal injury claims settlements rose 9% per annum, while the rate of inflation was less than 3%. Similarly, the claims settlement figures rose by 12% for serious injuries and the average settlement for an EL claim has increased by over 100% in the past five years. This is against an inflation increase of 20%. These figures, when combined with the following statistics, made it apparent that the average employer was already under pressure before this crisis made the headlines.
Moving forwardIt seems the underwriter has now had to become something of a fortuneteller. With so many significant developments occurring over such a short period of time, it is difficult to make any proper assessment of a risk by simply looking at the historical claims exposure. So, where do we go from here?With the recent significant rise EL insurance costs, the government has finally announced an imminent review. Just how wide-ranging and helpful this will be is not yet known, and there are fears that looking at the effects of sharp increases in EL premiums could represent a huge goal for the industry. We know that hundreds of businesses are operating without compulsory insurance cover, and there is no doubt that if incidents arise where the negligent party is uninsured, then the industry will ultimately have to pay. This could lead to an Motor Insurance Bureau (MIB) style set-up to fund such occurrences and then reclaim from contributing insurers based on premium income levels from that line of business. It follows then that the industry still incurs the liability, but fails to recover a premium.The industry should consider the implementation of a system of no-fault insurance similar to the workers' compensation scheme in the US. At first sight this seems an attractive option. But there are difficulties in implementing a programme of this nature without significant funding. The first is that the need for lawyers' input may not necessarily be dispensed with, as the huge question of quantum still remains. This could be addressed by introducing fixed price settlements, which would require legislation. The fear is that the government considers any interference with individually assessed compensation to be flying in the face of the overriding objective of the Civil Procedure Rules, as far as access to justice is concerned.The other suggestion was that the government should reinsure long-tail liabilities to release the market in much the same way as the Equitas arrangement revitalised the Lloyd's underwriting market. This would certainly allow the industry to go forward with more confidence. But whether the government would provide funds is another matter.
What can change?While the government looks at the problem, there are many areas where claim exposures could be improved and risk management programmes introduced. Such as:1. More claims should be investigated on site with the cooperation of the insured 2. It is a credit to the industry that a decision has recently been taken to extend the current Claims and Underwriting Exchange (CUE) home and motor databases to include a personal injury/illness compensation database. This follows the success of the NIPAR register in Northern Ireland. Insurance Database Services (IDSL) have sought and received agreement from the Compensation Recovery Unit to retrieve records submitted via CRU1 forms since the last archive (around 1997). This, together with the NIPAR records, will establish a database in excess of two million entries, which will be particularly helpful in avoiding duplicate claims against individual compensators and the failure of claimants to give an accurate history in relation to previous claims/injuries3. More effective use of rehabilitation services is something that has been proven to impact the overall cost of personal injury claims 4. Quality investigations and claims handling. Adequate training in investigation techniques, damages, assessment, and negotiations skills are an absolute must.There are undoubtedly many challenges ahead in this sector, but the industry can make a significant impact on the increased cost burden, while we await the outcome of the current review process. Owen Gorman is regional manager at Crawford & Co's liability division