I am sure that, like me, many of us in the claimant sector celebrated the twoyear anniversary of the then Chancellor George Osborne’s announcement that the government wanted to reform personal injury (PI). Yet, over two years on from 15 November 2015, royal assent for the proposals seems as distant a prospect as ever.
The government is unsteady on its feet thanks to the bitter struggle over Brexit, which is slowly tearing the Tory party apart, and the ideological divide is exacerbated by Theresa May’s failure to win a working majority in the June 2017 general election.
Nevertheless, the Ministry of Justice (MoJ)), under the latest Lord Chancellor, David Gauke MP (just in post at the time of writing), is still committed to bringing the Civil Liability Bill onto the statute book and making good the promises made by the Conservatives in the Queen’s Speech in June last year.
The measures would see those making motorrelated PI claims worth up to £5,000 typically being unable to recoup the cost of any legal advice. In addition, a new tariff system is proposed to provide compensation for pain and suffering at a level greatly reduced from the current position.
These two factors, when combined, will result in the vast majority of injured persons being unable to secure legal representation; however, non-fault claimants will still able to claim for physiotherapy and loss of earnings.
As if determined to demonstrate that it is ‘business as usual’ despite the general election meltdown, the MoJ has commissioned a number of working groups to debate and discuss the implementation of the Civil Liability Bill. These groups are exploring various details that underpin the reforms, including the definition of whiplash, the tariff structure, and future IT protocols and requirements (in the light of the government’s broader commitment to online courts). A steering group made up of representatives of insurer bodies and claimant trade bodies oversees the working groups.
It remains to be seen why some claimant representative bodies are having tea and biscuits with MoJ officials to implement a bill that has yet to be published and to which they profess to be vehemently opposed. But that is a separate matter. The Ministry of Justice... under the latest Lord Chancellor, David Gauke MP,... is still committed to bringing the Civil Liability Bill onto the statute book and making good the promises [about PI reform] made by the Conservatives in the Queen’s Speech in June last year.
What is increasingly clear is that other events have overtaken the issue. Not simply the big events, such as the EU referendum and the general election, but also the so-called facts and figures that drove the insurers’ lobbying efforts, and the government’s response, in the first place.
Much of the impetus for PI reform came from insurers that do not have a big, direct motor book, such as Allianz, Axa and Aviva. These businesses had nothing to lose and everything to gain from a reduction in PI claims (and the knock-on effect on citizens’ rights) because the revenues generated by non-fault claims (ie, credit hire and personal injury) accrue to intermediaries who own the direct relationship with the policyholder. The intermediary will be contacted first following an accident.
Direct writers, on the other hand, have been far less strident in their support for the bill because, as their business model implies, non-fault customers contact them directly and they take a substantial cut of the after-theevent revenues via their contracts with credit hire suppliers, rehab clinics, medical reporting companies, law firms and other businesses that sit along the claims value chain.
Apologists for PI reform tell us that their campaign is founded on principle; the principle being that fraudulent customers are gaming the system for cash and ordinary motorists are paying for it. This is pure hokum.
In its half-year results presentation to the market, Admiral, the giant car insurer, said in August 2017 that:
Yet, car insurance premiums have risen to historic highs and show little sign of subsiding, despite Admiral’s statement that it expected both frequency and cost per claim to continue to fall.
If the ‘whiplash epidemic’ that Association of British Insurers’ (ABIs’) spin doctors are so fond of citing is indeed a material risk to insurance companies, those insurers are required by the regulator to make that risk ‘a clear and present danger’ in their annual report and accounts. (I can save people searching: not one insurer has stated that whiplash (or fraud) is a material risk to their business.)
‘Deep Throat’, the Washington insider turned informer in the film classic ‘All the President’s Men’, famously advised Washington Post reporter Bob Woodward to ‘follow the money’ if he wanted to establish the truth about the role of the White House in the Watergate burglary.
My advice to students of personal injury reform is to do the same: follow the money and you will find that, according to the Office for Budget Responsibility, reform leads to an extra £830m revenue for insurers, which they will no doubt return to their grateful shareholders at the expense of claimants, who will be denied the opportunity to seek redress in court.
Those claimants could number up to 600,000 injured people each year, according to research carried out by Capital Economics for Access to Justice.²
MPs are waking up to the implications of this for the civil justice system. The Justice Select Committee, chaired by the highly respected Bob Neill MP, has reinstated its inquiry into personal injury reforms.³
Speaking last year at the Tory party conference, Bob Neill said, during a fringe meeting organised by the Social Market Foundation, that he had not been convinced of the government’s rationale for the reforms and there should be more government focus on an evidence-based approach to policymaking on issues such as insurance fraud. He said that he supported a full review of the LASPO Act, which the government has promised but not yet published, and called for more government action on claims management companies’ regulation.
What Bob Neill may be inferring is that, as delays to PI reforms continue, the LASPO Act has presided over a reduction in claim volumes and claims costs, as Admiral pointed out in August (see above). The longer the delay, the more one can argue that the reforms are intended to fix a perceived problem that is already being fixed.
And this is not just lawyerly spin. The third report from the Institute and Faculty of Actuaries states that the ‘proportion of … cost from Third Party Legal Fees has reduced from 40% in 2012 to 27% in 2015’; ‘[ t]he settled average cost for 2014 is £1,100 (or around 50%) less than 2012 at the same point in development’ ; and ‘[ t]he new level of legal fees appears to have become embedded post LASPO with the average cost broadly similar in 2015.’
Bob Neill’s party conference comments were echoed by fellow Conservative MP Alberto Costa, who, speaking at the same fringe meeting, also made clear his view that the UK’s civil justice system was ‘world class’, but under threat. He explained that the adversarial nature of our civil justice system was partly responsible for its premier reputation, and while it was important to operate justice efficiently he cautioned against an approach that would compromise a system where claimants and defendants have to prove their case in front of a judge.
Alberto Costa and Bob Neill are just two of a number of Conservative politicians, who have stared the insurance industry’s spin machine in the face and found its arguments wanting. Other Conservative backbenchers who have taken the time to listen to, and weigh up, the arguments for and against personal injury reform are also taking a different view from the government.
Whether the Lord Chancellor is prepared to take another look at the reforms is a moot point. The MoJ’s prime focus at this stage is prisons, as well as bringing forward legislation to change the mechanism by which the discount rate is set for serious injuries.
In February 2017, the then Lord Chancellor Liz Truss, acting on the advice of the Government Actuary's Department and others, changed the discount rate from 2.5% to -0.75%. The rate is used to offset the returns made by injured people investing their compensation payments, and had not been changed since 2001.
The discount rate has overtaken PI reform as the ABIs’ primary ‘whinge du jour’, but the principles underpinning both the discount rate and personal injury reform are remarkably similar, boiling down to the fundamental question: ‘What is insurance for?’
Most of us pay our insurance to ensure that we can withstand accidents and mishaps without hardship. And, if we are unfortunate enough to suffer a catastrophic injury, we and our families have sufficient financial protection to manage lifechanging injuries via compensation.
In this respect, insurers have largely taken over from the state in the provision of this service, and in return motor insurance is compulsory, giving the insurance companies skin in the game and the opportunity to profit from their business by adhering to the principle that the many pay for the few.
In recent years, and especially since the global financial crisis, the investment returns that insurance companies use to boost their profits and pay dividends to shareholders have shrunk dramatically, thanks to ultra-loose monetary policy and historically low interest rates.
However, the cost of claims has risen relentlessly, and now accounts for 60% of the entire operating costs of the industry.
Insurers have to square the circle of paying out claims and living up to their fiduciary requirement to maximise financial returns for the benefit of shareholders. Before the global financial crisis (GFC), the rates of return on investments were high enough to obviate the need to reduce claims costs. In 2018, the picture is different: insurers are no longer able adequately to perform their historically noble task of protecting the public from the impact of misfortune while satisfying investor appetites.
To make matters worse, UK insurance companies are highyielding stocks, with dividends paying out as much as five per cent annually. The regulator, worried about financial risk following the 2007 crash, also insists that insurers invest a high proportion of their income in low-risk gilts and bonds, which deliver lower returns than other bets, for example equities, which are perceived to be more risky.
Under Solvency II rules, insurers have also been required to pump additional capital into their balance sheets to protect their businesses from another financial shock. Senior management teams have become experts in managing their balance sheets and finding the optimum place for their capital, but in so doing have perhaps forgotten their traditional purpose: helping people in their hour of need.
When the ABI described the change to the discount rate in February as ‘crazy,’ it was proof that the industry worried more about the effect of the change on its balance sheet and rising car insurance premiums, and less about the impact on catastrophically injured people, often youngsters, who had already been shortchanged by a disproportionately harsh discount rate during the post-GFC period.
These macro movements in government and regulatory policy, and their effect on insurance companies, are now trickling down to impact directly on the general public.
Government, having divested itself of evermore of its responsibilities in favour of private enterprise, now finds itself having to step in and fix problems that have accrued from the policies which created the GFC in the first place.
As a result, all UK citizens are, in 2018, still paying the price of unfettered capitalism and the greed of investment bankers in the first decade of the 21st century. The costs of bailing out banks have permeated all aspects of our society, most obviously in the form of higher taxes, wage restraint, and a slowdown in the funding of public services.
The GFC and its aftermath has also, arguably, driven a loss of confidence in the institutions of government and business and encouraged a large swathe of the population to plump for Brexit, which has thrown a spanner in the works of the business of politics, including the passage of the Civil Liability Bill.
The PI reforms threaten the civil justice system, and rights of redress under tort that British people have been privileged to enjoy for centuries. But in truth, the proposals are just another item in a long list of bills we all have to settle up to pay for the crimes and misdemeanors of a get-rich-at-all-costs group of bankers and investors in the late 1990s and 2000s.
A2J remains hopeful that Conservative MPs will acknowledge the importance of access to justice, and urge the government to row back on its plans. We have always argued that a compromise arrangement, the alternative claims framework, will deliver most of the government’s aims, ie, reducing frivolous claims and getting rid of claims touts and cold callers, yet maintain citizens’ rights to gain redress in the court. A2J is the only campaigning organisation that has a workable solution. Now is the time for all those with an interest in preserving our civil justice system to get behind it.
1 Admiral 2017 Half Year Results, 16 August 2017, available at: https://admiralgroup.co.uk/sites/default/files_public/slides/2017/08/2017-interim-results-slides.pdf
2 Capital Economics: Road traffic accident personal injury claims, results from a survey of law firms, July 2017
3 For further details, visit: https://tinyurl.com/yb4cbxbm
4 Simon Black and Robert Treen, Update from the Third Party Working Party, page 17 and page 16 respectively
5 ‘ ABI responds to 'crazy' decision to change the personal injury discount rate’, news article, ABI, 27 February 2017, available at: https://tinyurl.com/yc2rj8ap