Evidence submitted by Anthony H Silverman,
Fellow, Institute of Actuaries
1. The level of UK compensation claims looks
low in an international context, not just compared to the US where
"tort costs" are three to four times as high but also,
according to work done by consulting actuaries, in a European
context as well. UK citizens still appear relatively unwilling
to consult a lawyer even when they have potentially valid claims.
On the basis that this will change, the prevalence of claims management
companies may turn out to be a temporary phenomenon. In general
terms the overall scale of compensation claims in a cohesive society
depends on a combination of the role of the state in welfare provision
and the importance attached to the civil justice system. Research
may be appropriate to look at ways to encourage good cases to
be pursued so that the perversely high success rate of 95% for
bodily injury claims in the UK might be reduced somewhat. It is,
of course, important that the value of justice is brought in to
any accounting of the benefits and costs of litigation.
INTRODUCTION
2. The existence or otherwise in the UK
of a so-called "compensation culture" is of interest
to the insurance sector as, when a compensation claim is made,
the allegedly at-fault party's insurer is usually responsible
for paying any successful claim and will usually handle the policyholder's
legal defence. The legal framework for compensation claims therefore
has a pivotal influence on insurers" profitability. In general
terms insurers" nearer term commercial interest clearly is
that the value of claims should be minimised, and consequently
insurers have taken a prominent role in the public debate on "compensation
culture".
3. It may be argued that over the longer
term the interests of the insurance sector are somewhat different
as the scale of the industry is dependant on the overall scale
of claims.
4. Having, as an analyst with investment
banks, followed the insurance sector, in the US and Europe in
particular, I believe I have some relevant observations for the
Committee inquiry into the UK's so-called "Compensation Culture".
5. The percentage of any territory's GDP
that is reallocated by means of compensation type claims can,
in principle, be defined as a product of two factors. The first
is the extent to which compensation is provided by the government
out of taxation rather than being provided by an at-fault party
identified through the civil justice process. The second factor
is the importance that is then attached by society to making at
fault parties accountable for their actions/omissions through
the payment of compensation. The following considers how these
factors can vary in different territories, looks at some work
that has been done within the actuarial profession on where the
UK stands, and considers what this work means for the level of
compensation claims in the UK viewed in a wider context.
A LOOK AROUND
6. At one end of the spectrum there is the
US where, at least in theory, little is provided by the government
and an elevated importance is therefore attached to the civil
justice system. Indeed what in the UK is usually referred to as
"the legal system" is usually spoken of in the US, in
a telling contrast, as "the justice system". If the
government, in general terms, does less and the legal system does
more then citizenship acquires a subtly different balance. There
is a degree of participation in the civil justice system in the
US including, for example, the direct election of State court
judges and, perhaps most importantly, the use of juries in civil
cases, that is largely absent in the UK. The elevated profile
of the civil justice system may be seen as an essential component
of the remarkably robust consensus around the nature of their
society. In a society with such enormous variations in wealth
it may well be essential for good order to have a legal system
which means, in simple terms, that if anyone can truly blame someone
else for their misfortune, the legal system would be expected
to provide an avenue for redress. At the same time people in the
US have historically been less likely to vote in elections than
is the case in the UK.
7. There are always, of course, tensions
in the US around the subject of "tort reform" but, at
the end of the day, there is a balance of forces which clearly
is a different one to that in many other territories.
8. There is a sense in which aspects of
what in Europe might be seen as welfare and social policy are
"privatised" to the legal system in the US.
9. The forgoing dwells a little on the US
because I believe it illustrates issues which, ultimately, are
where the choices have to be made when we are considering where
to pitch an appropriate level of compensation claims in our own
society.
10. The older European model is very different.
Fundamentally, more is expected of the government and less is
expected of the legal system. Civil wrongs are more likely to
be righted by obtaining the intervention of an arm of government,
or even by some form of civil disobedience. The legal system is
seen more as an instrument of the rich, though even they might
historically have found its costs prohibitive. Some common civil
wrongs may be dealt with by compensation schemes paid for out
of taxation. Inevitably such a more centralised system will be
slower to develop and react as circumstances change, if it reacts
at all. Equally it seems inevitable that citizens also are less
likely to feel their fate is in their own hands, but then the
system does work on the basis that people will place trust in
the government anyway.
THE UK
11. Can we quantify in any way where we
are in the UK? A discussion paper, which was not peer reviewed,
was prepared by a working party of the Institute of Actuaries
in 2002, under the somewhat loaded title of "Cost of Compensation
Culture" (referred to as the "discussion paper"
below), which attempted to do just that. The discussion paper
received a great deal of publicity but has been contentious within
the actuarial profession ever since it was published. It engaged
with a pivotal issue for the insurance sector and, to that extent,
was very much to be welcomed, but it contained, I believe, some
serious flaws, particularly in the use made of some of the data
that was gathered. Unfortunately it has formed the basis of much
comment on where we stand in the UK.
12. However the work done for the document
can be utilised for a somewhat more rigorous attempt to see where
we are.
13. Some of the changes required to make
better use of the data were set out in an article in The Actuary
magazine of September 2003 (see http://www.the-actuary.org.uk/pdfs/03_09_04.pdf)
written by myself.
14. Adjusting the discussion document use
of data (in order to preserve proper comparability with the quoted
US number for the percentage of GDP subject to reallocation through
the tort system) produces some instructive results. I estimate
the relevant percentage of GDP at the time of the paper is around
three times as high in the US as in the UK (0.7% in the UK compared
to 2.03% in the US on 2001). A significant part of both figures
derives from motor liability claims and excluding these the US
percentage of GDP becomes over four times as high as in the UK.
Even these figures are derived after excluding all punitive damages
from the US figures.
15. Compensation claims in the UK may have
expanded to a degree in the period after conditional fees were
introduced in 1995 but clearly, if we are moving at all in the
US direction, then we are likely to have a very long way still
to go!
16. The front page projection in the discussion
paper that UK compensation claims are "set to continue rising
at over 10% per year" has turned out to be far too high.
According to a Datamonitor report, also quoted in the above Actuary
magazine article, claims actually fell in 2001. Total UK motor
claims have grown at just 2.9% per annum between 2000 and 2003
according to ABI data (adding the "change in provisions"
reported in the following year to each year's claims number).
Incidentally, the expectation in the discussion document that
US tort costs, having been over 2% of GDP were set to be "coming
down" also proved wrong. Subsequent versions of the study
used in the paper in respect of US tort costs (by Tillinghast,
a firm of consulting actuaries) have shown a small increases in
tort costs as a percentage of US GDP (to 2.23% in 2003 compared
to 2.03% in 2001 and the 1.83% in 2000. So the gap between the
US and the UK seems, if anything, actually to be widening.
17. As regards comparisons with continental
Europe, the following is a quote from the IoA discussion document
18. The table below shows the tort costs
as a percentage of GDP (in 1998) for selected countries as measured
by Tillinghast:
| Country | Tort Cost (% of GDP)
|
| US | 1.9 |
| UK | 0.6 |
| France | 0.8 |
| Japan | 0.8 |
| Canada | 0.8 |
| Australia | 1.1 |
| Germany | 1.3 |
| Italy | 1.7 |
| |
19. It is likely that all systems are subject to a level
of invalid claims and to some level of fraudulent claims. Again
it is hard to see that the UK is out of line. A letter to The
Actuary magazine from actuary Guy Thomas, commenting on the discussion
document stated:
"the paper incidentally notes that over 95% of bodily
injury claims in the United Kingdom are in fact successful. This
astonishingly high figure suggests that too few claims are pursued,
not too many".
This perversely high percentage is at least partly the result
of the "After the Event" expenses insurance system in
the UK where the insurers, naturally, are looking for the solicitors
involved to have as high a success rate as possible. Unlike in
the US, the risk taker regarding legal expenses (a role that the
claimant's lawyers are able to take on in the US in the absence
of liability for defendants" expenses) has no share in the
proceeds of a successful case. So the actual seriousness of a
claim, which is a combination of the claim amount and the likelihood
of success in court, may not be properly reflected in the decision
as to whether a potentially valid case is pursued. Research may
be appropriate to look at ways of improving the perverse incentives
which may currently be in place.
20. The "Better routes to redress" report described
the so-called compensation culture in the UK as an "urban
myth". The report was the subject of an article published
in The Actuary magazine, also by Guy Thomas, which again showed
the Institute's discussion paper stance to be contentious (see
http://www.the-actuary.org.uk/pdfs/05_10_02.pdf)
. . . which means that, as regards compensation culture
21. There are, no doubt, many ways to interpret statistics
but, in light of the above, any genuine attempt to locate the
level of UK compensation claims in an international context cannot
conclude it is out of line except to say that, on the face of
it, it is very much at the low end of the range.
22. The Committee may wish to research slightly more
up to date numbers but the nature of the story is clear.
23. What clearly would be peculiarly unacceptable would
be for the government to withdraw to some degree from some of
its historic roles as a guarantor of welfare, which it very probably
has done in the UK over recent years/decades and, at the same
time, for the legal system to be unable to step up to the challenge
of filling the vacuum.
24. In a sense the singular thing about the UK has been
the growth of non-lawyer claims management companies. It seems
that an unusually significant element of UK claimants with valid
claims have been, perhaps for cultural reasons, unwilling to consult
a lawyer. Perhaps there is still, in the aggregate, a somewhat
Dickensian view of the legal system as expensive and not an instrument
of redress for average folk. This is what needs to change. If
there really was an excessive inclination amongst ordinary people
to pursue legal claims then potential claimants would, of course,
be consulting lawyers whereas in fact they have been doing nothing
at all until the idea was sold to them by a claims management
company!
25. Ultimately the claims management companies may be
a transient phenomenon which has flourished in the period between,
on the one hand, a move towards a greater "access to justice"
on the part of the legal system and, on the other hand, the subsequent
catching-up of awareness and inclination on the part of people
with valid claims of their ability as UK citizens to obtain redress
through the justice system.
26. The discussion paper's often-quoted conclusion managed
to hardly allude to justice as a benefit of litigation at all,
or at least it did so only in the most oblique terms. It stated
". . . 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
to accident victims". There are no costs "to society"
viewed as a whole, that is to a society defined as including the
claimants and the civil justice process. But most importantly,
as regards benefits, the major benefit of litigation, indeed the
only reason civilised countries undertake the whole exercise of
running a civil justice system, is to expand justice and fairness.
27. The important point is that this latter value surely
needs to be accounted for explicitly in any judgement worthy of
the name regarding what to do going forwards. Can we say we have
sufficient emphasis on a "justice culture" in the UK?
28. It may be that we would benefit in the UK from substantially
reinforcing the vigour with which we promote a justice culture
and nurturing the role of the civil justice system.
Anthony H Silverman
Fellow
Institute of Actuaries
November 2005
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