Evidence submitted by the Actuarial Profession
EXECUTIVE SUMMARY
1. Personal injury claims costs have inflated
by approximately 10% per year for well over a decade. This is
confirmed by the data collated for the IUA/ABI study (see below)
and analysed by an independent firm of consulting actuaries. The
factual evidence of the IUA/ABI study is corroborated by a survey
of practitioners in the CCC paper (see below). The consensus view
of GI actuarial practitioners in the CCC paper is that personal
injury claims inflation has been 10%+ for the last decade and
is set to continue at similar levels for the foreseeable future.
During this time legal costs as a percentage of claim payments
have remained remarkably stable, so by corollary legal costs have
inflated by 10% per year over the same period. The consensus view
of actuarial practitioners as part of the survey in the CCC paper
is that the main drivers of claims escalation have been a series
of legal changes affecting claims costs and the increasing litigiousness
of society.
Does the compensation culture exist?
2. The fact that the cost of personal injury
claims, and associated legal costs, have escalated by double-digit
inflation for more than a decade is beyond doubt and we don't
believe any informed, unbiased, commentator would conclude otherwise.
Whether this constitutes evidence of "compensation culture"
is a moot point. What it does show is a steadily increasing cost
of compensation claims. The CCC paper, whilst (clearly) not representing
the views of every actuary, concluded that "We believe that
a Compensation Culture is developing in the UK". It also
noted that " . . . a more litigious society would be a bad
thing because the costs to society, both financial and in terms
of restricting activities, outweigh the benefits of providing
better compensation . . ."
What has been the effect of moving to "no-win,
no fee" contingency fee arrangements?
3. We believe the consensus amongst actuarial
practitioners is that "no win, no fee" agreements have
lead to an increase in the frequency of compensation claims, particularly
in the £5-15,000 size band. The 1999 IUA/ABI Study noted
that "We can see that claim frequency levels have increased
significantly more within the claim size band £5,000 to £15,000.
This tends to support the assertion that the "litigious effect"
or "compensation culture" appears to be centred on the
smaller claims and for minor injuries that might otherwise be
ignored by the claimant." (The frequency of £5-15,000
claims increased by approximately 150% over the period 1991-99
according to the actuarial analysis in the IUA/ABI study). The
introduction of "no win, no fee" arrangements was cited
in the survey of actuarial practitioners in the CCC paper as one
of the main reasons behind the double-digit inflation of injury
costs in the last decade.
Should firms which refer people, manage or advertise
conditional fee arrangements be subject to regulation?
4. One of the other conclusions of the CCC
paper was that " . . . the mechanism for Conditional Fee
Arrangements, Before and After-the-Event insurance is being determined
in an adversarial fashion by a series of test cases. This creates
delays and uncertainty for compensators and accident victims and
serves the interests of no one". We believe it is widely
accepted that, in the past, some "claims management"
companies have engaged in dubious practices to launch "claims"
when there was no reasonable basis to expect compensation. These
observations suggest that the greater regulation of claims management
companies, and clearer guidelines about the operation of "no-win,
no-fee" arrangements, would be in the public's best interest.
BACKGROUND ON
THE ABI/IUA STUDY
AND THE
CCC WORKING PARTY
PAPER
5. Actuaries have been involved in a number
of pieces of work that quantify costs and trends in compensation
payments. In October 2002 an actuarial working party published
a paper "The Cost of Compensation Culture" ("the
CCC paper"), which was published as the backdrop to a debate
on compensation culture at the profession's annual General Insurance
conference ("the GIRO conference"). For a number of
years, the Association of British Insurers and International Underwriting
Association have commissioned a multi-disciplinary bodily injury
awards study ("the IUA/ABI study"); this study included
an actuarial working party looking at trends in personal injury
claims.
6. The third IUA/ABI study, published in
March 2003, analysed over a million motor personal injury claims,
collated from all major UK insurers. It is the biggest exercise
of its kind ever undertaken, it covered more than 90% of the UK
insurance market and looked at all claims going back to 1989.
The statistical analysis was performed by a firm of actuarial
consultants, in conjunction with medical and legal experts who
looked at other aspects of compensation. The second study concluded
that bodily injury claims had been rising at an average of 11.7%
per year from 1989-99; the third study concluded that the cost
of bodily injury claims has risen by nearly 10% per year over
the period 1991-2001. Broadly the escalating cost of claims is
made up of 7% per year for increasing severity (average cost)
and 3% per year for increasing frequency. The main reason behind
the increase in frequency has been increasing numbers of claims
in the £5-15,000 size band. The study is widely recognised
by actuarial practitioners and other insurance professionals as
the definitive source of information on trends in industry-wide
motor personal injury claims.
7. The CCC working party reviewed all types
of compensation in the UK. It reviewed a variety of information
sources to make an overall estimate of the cost of compensation
claims in the UK, as well as reviewing recent social/legal developments
that affect the compensation environment. The working party conducted
a survey of general insurance actuarial practitioners to establish
their views of past and future trends in compensation amounts.
It also conducted a (limited) survey of members of the public
to get a sense of public views of the compensation environment.
The headline conclusion was that compensation claims (at the time)
totalled £10 billion per year and that this cost has escalated
at more than 10% per year in the recent past and is set to continue
to rise at a comparable level for the foreseeable future.
8. The CCC survey of practitioners looked
at both Motor and Commercial Liability (broadly accidents at work,
or in the street) injury claims. The views of inflation for both
categories were very similar. Ninety per cent of practitioners
believed the inflation rate of bodily injury claims had been 10%
or more over the last five years and 65% believed that inflation
would continue at 10% or more going forwards; the average view
of future inflation was 11%. Practitioners were asked what the
main causes had been of the high levels of escalation in injury
costs over the last decade. The introduction of no-win, no-fee
arrangements and an increasingly litigious society were two of
the top four reasons practitioners quoted. An increasingly litigious
society and other judicial changes were the top two reasons given
for the estimated 10%+ future inflation.
9. The separate CCC public survey was a
smaller exercise and was by no means representative of the public
at large, but overwhelmingly (more than 90%) the respondents thought
there had been a shift in the public's attitude to claiming compensation
in the last decade and more than 80% of respondents thought that
this was not a good thing.
DETAILS OF
THE ACTUARIAL
PROFESSION AND
MORE DETAILED
REFERENCE TO
THE IUA/ABI STUDY
AND CCC PAPER
10. Actuaries provide commercial, financial
and prudential management of a business's assets and liabilities,
especially where long-term management and planning is critical
to the success of any business venture. They also provide advice
on social and public interest issues. Members of the profession
have a statutory role in the supervision of pension funds and
life insurance companies. They also have a statutory role to provide
actuarial opinions for managing agents at Lloyd's.
11. In particular in the field of general
insurance, actuaries routinely advise insurance companies (or
other companies with claims-related exposures), either employed
directly or as a consultant or auditor, on appropriate levels
of reserves. This involves a detailed assessment of historical
claims costs and trends in the frequency and average cost of claims.
Actuaries are also involved in projecting claims costs, and hence
profitability trends, forwards and translating this into insurance
premiums for personal and commercial policyholders.
12. The profession is governed jointly by
the Faculty of Actuaries in Edinburgh and the Institute of Actuaries
in London. A rigorous examination system is supported by a programme
of continuous professional development and a professional code
of conduct supports high standards reflecting the significant
role of the profession in society.
13. The two papers referred to above are:
"The Cost of Compensation Culture"
("the CCC paper") was a report in October 2002 by a
working party of actuarial practitioners as part of the profession's
2002 GIRO conference. The paper is available on the profession's
Web site (www.actuaries.org.uk) http://www.actuaries. org.uk/files/pdf/giro2002/Lowe.pdf
and is published as part of Volume I of the conference papers.
ISBN reference 1-903965-06-03.
"The IUA/ABI Third UK Bodily Injury Awards
Study" ("the IUA/ABI Study") was published in March
2003. The various working groups included representatives from
a range of medical, legal, insurance and actuarial bodies. The
report was introduced and commended by Lord Phillips, then Master
of the Rolls ("These reports have made a valuable contribution
to our understanding of the consequences of bodily injury. They
have, in particular, stimulated debate about how the insurance
industry and the legal community should respond when people have
the misfortune to be involved in accidents"). ISBN reference
1-872207-29-4.
The Actuarial Profession
November 2005
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