Same market new model

When 2,500 furious staff of The Accident Group (TAG) reacted to their sacking by looting the firm's offices, they were not the only ones incensed by the ambulance chaser's demise which now owes £14.4m just to its preferred creditors.

The underwriters that wrote the policies sold by TAG may not have been told of its demise by text message, as its staff were, but plenty of industry figures believe they should have known long before that something was amiss.

GoshawK, the Lloyd's operator, reacted by issuing a profit warning sending its share price down by 30%.

Investors are now waiting for the Lloyd's managing agent's interim results on 26 September to find out the extent of the damage.

Together with fellow TAG underwriters NIG, Catlin, Allianz and Atrium, GoshawK is considering legal action.

The assumption is that they will allege that TAG failed to stick to agreed controls on underwriting - or even went as far as colluding with claimants to produce fraudulent claims to its underwriters.

But maybe those underwriters are also guilty of accepting business that perhaps they should have scrutinised more closely.

Within the legal expense business, tales abound of lax controls before TAG's collapse.

Among the most shocking is that one of the major insurers went as far as giving a binding authority to a Liverpool hairdresser to write legal expenses business.

Terry Lindon, director of legal services firm Invaro, says that in earlier business models underwriters were caught out by asking the wrong questions.

"They were asking how many cases do we lose. They should have been asking how many cases fall by the wayside or fail to succeed. The two answers are very different."

The answer most underwriters heard to the first question would have been "3% to 4%."

Claims farmers
The answer to the second question is more like 45% on industrial disease cases and even higher on 'slips and trips'. These are claims typically based on injuries allegedly received after falling due to cracked pavements or poorly maintained floors and became the bread and butter for many of TAG's claims farmers.

For any business that brings together claimants and lawyers, with an insurance policy to cover the risk of failure, the gap between 3% to 4% and 45% and higher is crucial.

Lindon claims that Invaro's business model is different - tougher, more thorough in its examination of claims and keen to reject any claim it isn't convinced will stand up in court.

When a bundle of claims arrives at Invaro, Lindon says, a thorough vetting and sorting process begins. A quarter are rejected immediately before what he calls "sceptical investigators" go through the survivors and weed out another 15%.

The remainder are examined by a panel of lawyers who weed out another 5% and pass the cases on to retired police officers contracted to do another stage of vetting. Only now does the claimant take out an insurance policy.

Every claimant's medical records is then examined.

In one case, a claimant had tripped on a pavement and suffered a broken wrist as a result. Sure enough, the pavement was in terrible repair. But the medical notes revealed the claimant had drunk 11 pints of beer before the accident. As Lindon says, "It's not fraudulent, but it would never get through court."

So far, so good - but both Claims Direct and TAG argued that they too had sound vetting processes.

Invaro's business model differs from both of its two unfortunate predecessors in one way. Claims Direct and TAG both borrowed money to fund their case's journey through the courts. It was the banks' reluctance to keep lending to TAG that precipitated its demise.

Invaro lends the money itself, from an investment fund of which Lindon is a director and Credit Suisse is a custodian.

A Japanese pension fund put in £80m from the beginning of the year and a Japanese bank is putting in another £250m from next month.

The money is needed because Invaro is expanding fast.

From its beginnings in March last year, it has grown its headcount from 14 to 152 and accelerated its case load from 3,000 from its foundation up to December last year and has now taken on a total of 28,000 cases.

In comparison TAG arranged insurance for 178,000 customers in the 12 months to the end of August 2002, estimated to represent a market share of about 25% at the time.

With TAG out of the way, can Invaro continue its expansion without further support?

Its current underwriting is arranged by specialist insurer IGI and is enough to take Invaro's capacity to its current 8,000 cases a month.

But Lindon plans to double that by July and admits he may need another insurer to help achieve that.

Lead insurer
Given the experience of GoshawK, NIG and others, will there be any insurers willing to listen to its pitch?

Judging by the approach of IGI managing director Keith Wardell, it is just possible.

Wardell claims he is no high-risks gambling type. "We are not brave," he insists. "We are a bunch of cowards."

And just in case we haven't got the message, he adds: "We are extremely conservative."

IGI is the lead insurer for Invaro in as much as it directs premiums, terms and conditions, but it does not carry the lion's share of the risks. Wardell says it will write and retain only about £6.5m of legal expenses insurance - with its co-insurers carrying about five times that amount.

IGI accepts after-the-event legal expenses business from only three sources, of which Invaro is one. Its before-the-event business is sold by Albany, Endsleigh and Marks & Spencer.

Wardell argues that it is the crucial vetting process that distinguishes a sound operation from a failure in the making.

As an insurer prepared to write the business he is very much in demand so he can at least choose the outfits he trusts. When Insurance Times spoke to him, he had four presentations sitting on his desk from companies looking for underwriters.

He concludes: "For a prudent underwriter that understands the product, it's a good viable market.

"There's enough genuine claims out there that if you aren't greedy or stupid you will earn a very nice living from. But you won't get rich quickly. This is a long term business and if you are sensible you will make long term returns."