Now Who Pay's?

The dismissal in May of 2,500 The Accident Group's (TAG) employees was a crucial point in the legal expenses market. Not only did it mark the end of one of the UK's most notorious claims farmers, it also left many wondering what the future holds for after-the-event (ATE) legal expenses insurance.

The pain of TAG's sudden demise spread a lot further than the employees who infamously lost their jobs by text message. Many insurers were hit hard. Lloyd's operator GoshawK was one of the first corporate victims, setting aside millions of pounds to cover its losses from TAG. NIG, Allianz Cornhill Legal Expenses and Lloyd's operators Catlin and Atrium also suffered. And the damage did not end there.

A number of legal firms are now poised to scrap their personal injury departments. And banking group HBOS could be left to foot the bill for hundreds of thousands of outstanding claims.

A shadow has been left over the operation of claims farmers. And questions have been raised over the efficacy of ATE insurance and no-win, no-fee arrangements as a way to provide access to justice.

AXA claims technical manager Graham Plumb warns of a danger that the market will begin to retract as underwriters reassess their appetite for ATE business. Insurers, he says, will be looking a lot more closely at the schemes they underwrite. They will want to check that the premiums being charged by the ATE provider are fully recoverable - something that was not the case with the TAG model. Underwriters, he says, will not want to repeat the mistakes made in relation to TAG.

"People thought TAG was different to Claims Direct, but perhaps they didn't think hard enough."

There are signs that market's appetite is beginning to decline. NIG has recently put all of its legal expenses business under review. And market rumours suggest the insurer is even going so far as to stop writing all new ATE business.

Further pressure on capacity will also come from reinsurers who are becoming more concerned about their potential exposures. Brit legal expenses underwriter Leo Gibbons says it is now difficult to get adequate stop-loss reinsurance, which ATE underwriters use to limit the losses on their portfolios. He blames reinsurers' uncertainty on their lack of knowledge of the sector: "Everything needs to be explained to them from scratch."

Nevertheless, despite the potential capacity problems, Plumb says that in the short term the gap left by TAG will be filled by other providers.

"I just hope that the newcomers charge sensible premiums. If they do, that's fine - we are happy to live with no win, no business."

In the longer term, however, Plumb says that an agreement will need to be reached between insurers and ATE providers on the mechanics of ATE insurance and conditional fee agreements (CFAs).

"At the moment there is more satellite litigation on costs than there is on substantive claims. Meetings have been held with ATE providers, but no agreement has so far been reached on the extent of cover and level of premiums. Judges want the industry to reach an agreement on how these schemes will run."

Plumb says that the creation of a trade association of ATE suppliers would help the discussion process. At present no such body exists and insurers must speak to each provider individually. He also attributes the immaturity of the market to the lack of consensus. "In a couple of years' time the market might settle down and we will reach an agreement that the providers will stand by.

If not, an agreement will be imposed on us."

So what of the ATE market in the longer term? Is a successful ATE model possible or desirable?

DAS assistant general manager Tony Buss argues that TAG 's demise sounds the death knell for other claims management companies. "A lot of what they spend, such as advertising, is not recoverable. Only half of TAG's premiums were recoverable. There is simply no room for claims farmers on the scale of Claims Direct or TAG."

Gibbons, on the other hand, still sees a place for claims management companies.

He says many insurers did not work with TAG because of fundamental problems with its business model, pointing to its high abandonment rate - a measure of the number of cases that actually proceed - as symptomatic of these problems. But, he argues that ATE can work if the pricing and risk selection is right.

"Other claims management companies have tighter controls, a smaller panel of solicitors and a closer relationship with underwriters. The model needs to be right to write a claims management account. ATE business has not turned fundamentally bad because of the TAG experience."

Nevertheless there is room for improvement, says Composite Legal Expenses managing director John Mullin. He argues that the market's capacity and efficiency must be increased and that the government, banks and insurance industry must work together to achieve this. He says that there needs to be greater co-ordination between the insurance industry, which provides the products, and the banking industry, which provides the funding.

Mullin argues that the government is not going to restrict access to justice and that, if its goals are to be achieved, the insurance and banking industries have a crucial role to play. Both sectors must be persuaded that the market is a profitable one to be in. And costs must be taken out through the use of e-commerce platforms and by the removal of intermediaries, such as claims farmers, who add no value to the process.

Allianz Cornhill divisional manager Phil Ruse says that a successful ATE model requires a "more equitable and ethical cost structure" - a revenue model that is not met at the exclusive expense of defendant insurers. Costs must be transparent and kept to reasonable levels, he says. And claims management companies must review their business models to ensure that they only select claimants with strong cases.

"Acceptable models for the future will be those that have the ability to bring genuine claimants access to compensation in a cost effective way. The risk to the ATE insurer, solicitor, funder and liability insurer has to be acceptably contained."

A side effect of the continued wrangling over the mechanics of ATE and the bad press surrounding it is that before-the-event (BTE) insurance will prosper, according to Buss.

BTE insurance has been available in the UK since 1974. It is often used by insurers as a marketing tool to enhance traditional insurance products such as motor and home insurance. The advantage for insurers is that if the claimant has a BTE policy, an ATE policy, with all the associated problems, is not needed. "The BTE market has grown tremendously and will continue to do so as a result of TAG," says Buss.

Ruse agrees that while the case for BTE insurance "has never been stronger", it needs to shake off its image of being a "low cost, no value bolt on" and be considered a mainstream product.

"Market research suggests a low consumer awareness of BTE. Awareness needs to be raised by communicating the value it brings to claimants, and by thinking creatively about how the product can be distributed."