by David Marshall, Anthony Gold, London


Bodily Injury Awards Study

On 8 October 2007, the Association of British Insurers and the International Underwriting Association launched their fourth UK Bodily Injury Awards Study. Despite the all-encompassing name, this in fact focuses on bodily injury caused in motor accidents only. And, despite the scepticism that those on the claimant side of the fence might feel about the provenance, there is no doubt that the statistics captured and the numbers crunched are impressive. It is certainly the most comprehensive of the four studies, covering data from insurers' records of two million motor bodily injury claims.



As with all statistical studies, however, it is important to delve beneath the spin and hype, and read more than the press reports and the executive summary to get a feel for what the data really shows.



Pounds and pence

For example, much has been made of the level of legal costs expressed in the executive summary as '43p for every £1 of compensation'. The 43p figure does not appear anywhere in the substantive report, but is simply a mathematical expression of the data contained in the report which shows that legal costs (which for this purpose includes medical reports and other disbursements, such as court fees, after-the-event insurance premiums and VAT) 'as a percentage of total personal injury payments in private car comprehensive claims have been around 30% since 2002. This is consistent with the findings of the last study for earlier accident years'.



In other words, the real story is that legal costs as a percentage of total pay-outs by insurers have remained constant at 30% for many years. This is consistent with the separate research by Professors Paul Fenn and Neil Rickman for the Civil Justice Council, which showed that costs rise proportionately to the damages which underpinned the predictable costs scheme. Lawyers are being paid more, but only proportionately more, for obtaining extra compensation for their clients. It would be more newsworthy if lawyers were being paid more for obtaining less compensation or paid proportionately much more than the increased compensation. The truth is rather more prosaic.



However, in reporting the figures, while avoiding the obvious trap of reporting 43% instead of 43p, the Telegraph then claimed 'this figure has soared from the 30p paid in 2005', suggesting a 50% increase in legal costs in one year. The real story (except, of course, it wouldn't be one) is that it is 43p or 30% both in 2005 and 2006 and indeed for many years before. In the lower-value cases, the proportion of legal costs to damages is higher and, as all sides agree and as the government has proposed, this needs to be addressed. However, the stubborn linkage of costs to damages over many years suggests caution in the assumption that changes to process (rather than, for example, to the substantive law) can achieve substantial cost reductions.



Serious increase

The study also shows that more compensation is being paid to the seriously injured. The most severe 0.1% of claims (about 300 a year) have received compensation which has increased at 8.3% per annum over the past ten years. The increases are compared against average earnings increases over the same period.



But although this is an instructive comparison for insurers seeking to estimate reserves and premiums, the increase in damages reflects not current trends in average earnings, but rather the obvious need for the compensation to last longer for the future in the face of increasing life-expectancy and improved medical procedures and care. And compensation is just that - compensatory. It does no more, and no less, than ensuring that injured people are as far as possible put back into the position they were in before the accident.



That might be thought to be a 'good thing', although as it increases the cost to insurers, they might perhaps be forgiven for seeing it as a 'bad thing'. This 'double think' even finds its way into the expressions used to describe the phenomenon. At one point, the authors of the study say that they have abandoned the loaded phrase 'claims inflation' used in earlier editions and replaced it with the more politically correct 'claims escalation', although in practice both phrases appear more or less interchangeable throughout the study. The report of the legal working party in the study helpfully summarises significant legal developments over the past ten years. But, in fact, notwithstanding these, the overall average cost per claim has increased by 3.7% per annum over the past five years (less than the annualised increase in average earnings over the same period).



Motoring up

But the overall cost to insurers, as the main study emphasises, depends both on cost per claim and frequency of claim. And it is the increasing number of motor personal injury claims in 2005 and 2006 (after a long period of stability) that is most interesting.



The evidence for this increase in the study is supported by the independent data supplied by the Compensation Recovery Unit. The study's analysis suggest that it is only a specific category of claims - those with a settlement value (including legal costs) of £2,000 to 5,000, and described by the authors as 'whiplash' cases, which have increased. The study makes much of the corresponding fall in the Department of Transport's reported accident statistics over the same period.



Some caution is required here because the government statistics relate only to accidents reported to the police where there is 'fatal', 'serious' or 'slight' injury. However, it has long been known that the government figures under-record accident numbers (the latest in a series of studies on this was published in June 2006 by the Department of Transport). It is particularly likely that accidents involving only soft-tissue injuries will not have been reported to the police, or will have been noted as not involving even 'slight' injury if the victim was not transported to hospital. What would be of interest is whether the overall numbers of collisions reported to insurers has similarly altered over the ten years, but this is not published in the study.



But even taking the figures at face value, it would appear that there is an increased number of people injured in motor accidents claiming compensation. Again, this might well be thought to be a 'good thing'. But why is it happening? Claims management companies and 'no win, no fee' lawyers seem to be free from 'blame' because the increases long post-date the collapse of The Accident Group and Claims Direct and the introduction of conditional fee agreements (CFAs). Motor claims have always been a relatively small proportion of clients handled by claims management companies and under CFAs.



Two hypotheses might be tested further. First, the government's response in 2004 to the Better Regulation Task Force's report concluded that there was no compensation culture, but there was a perception of a compensation culture which the government would take steps to address, culminating in the Compensation Act 2006. This is a rather tricky message to deliver because, by taking steps to draw attention to a perceived phenomenon which does not actually exist, there is a risk that, rather than diminish the perception, you create a reality where more people believe that it is right and proper to claim compensation (whether or not that is seen as a 'good thing' or a 'bad thing').



Second, the increase in motor claims in 2005 and 2006 coincides with a big increase in the amount of gross written premiums for (mainly before-the-event) legal expenses insurance, as reported by Datamonitor in its recent report on personal injury. There has also been anecdotal evidence of a big increase in liability insurers' 'third-party capture' activity, whereby they seek to 'capture' potential claimants before they claim through either a lawyer or a claims management company, dealing direct or referring them on themselves to a solicitor or claims organisation.



Both increased availability of before-the-event legal expenses insurance and third-party capture would seem to be likely to lead in particular to an increase in claims frequency in the £2,000 to £5,000 claims band. Some evidence to support this hypothesis might be seen in the report of the Motor Insurers Bureau (MIB) included in the study (where there is no liability insurer to capture potential claims), which does not show a similar increase in claims frequency.



Confidence trick

The MIB report is included in the study for the first time. This is interesting and provides some evidence to show that more than one in 20 cars on the road are uninsured (this figure is much higher in some postcode areas). The MIB also faces more big claims, largely because of the much lower age-profile of uninsured drivers, which 'often translates to a car full of young people, sometimes fuelled by drink or drugs, being involved in an accident... the driver losing control of the vehicle and other young people being seriously injured, often with catastrophic consequences plus, of course, the impact upon the innocent victims in other vehicles'. The MIB has reserved 400 cases (which may include more than one claimant) in excess of £1 million, of which 10% exceed £5 million. More than £1 billion (53% of the MIB's total reserve) is reserved for less than 1% of claims against the MIB.



The report of the rehabilitation working party in the study reports on a 'further substantial increase in the use of rehabilitation'. However, it also reports scepticism on both sides, particularly for lower-value claims, but it suggests possible ways forward to improve the trust and confidence of all. There is also a reported concern over the lack of quality assurance standards for providers, concluding 'the insurance industry has wasted a lot of money on sub-standard service to the detriment of claimants'. Funding for a rehabilitation council, which might drive forward take-up and impose and enforce quality standards 'remains an important outstanding issue'.



For the more complex claims greater than £100,000, the study also provides 'clear evidence that claims are being settled much earlier... which is good news to both insurers and claimants'.



So, in summary, the fourth UK Bodily Injury Awards Study shows that for legal costs which are precisely the same proportion of the total payout as in previous years, more people injured in road traffic accidents are receiving more rehabilitation and more compensation more quickly. Good thing or bad thing?