Legal perspective - An inflating issue

Rising claim inflation seems to be showing no signs of going away, echoing three previous injury award studies. While there has been a slow-down, possibly due the lack of recent influential legal developments. Paul Parke argues that those on the horizon could easily reverse this trend

The fourth UK Bodily Injury Awards Study published last Monday was the biggest exercise of its kind ever undertaken. It analysed trends in motor insurance injury claims and the key legislative and legal developments driving them; drawing together research by legal, actuarial and rehabilitation working parties.

The study has mirrored the conclusion of the three previous studies (in 1997, 1999 and 2003) by revealing that both the number of claims and the level of compensation paid out by insurers have continued to increase significantly, with the overall cost per policy or 'burning cost' increasing by 9.5% per annum between 1996 and 2006. This is despite government statistics showing that the number of people killed or injured on UK roads fell by 19% during this period.

Claims inflation

The legal influences driving claims inflation are well known, which include the increase in the amount that the government can claw back from insurers for the cost of medical treatment of road traffic accident victims; the significantly higher care awards; changes in multipliers; increased general damages awards; the introduction of periodical payments; cultural changes; and increased legal costs.

The recoupment by the NHS of treatment costs has had a dramatic impact on claims inflation, with the maximum repayment limit increasing by 1200% - from £3000 for accidents before July 1997 to £37,100 after April 2006. Care awards have also increased significantly above average wage costs inflation. Multipliers have risen from a maximum of 18 in 1997 to 35 in 2007. Similarly awards for general damages have dramatically increased, with the highest award for quadriplegia rising 64% since 1998.

However, the actuarial report (see analysis, p13) suggests that there has been a small reduction in the rate of increase of claims inflation to 7% in more recent years. And the legal report concludes that this is attributable to there having been fewer significant legal and other changes in the relevant period.

In each of the three previous reports there had been a major legal development driving claims inflation; for example, the move from a discount rate of 4.5% to 3% and then to 2.5%. Similarly the Court of Appeal decision in Heil v Rankin (2000) moved up the level of awards for general damages by up to 30% at a stroke. While the report showed that there have been significant legal changes in the past four-year period, these have not perhaps been as influential as in previous years.

Worrying statistics

The report's conclusion that claims inflation is running at higher levels for catastrophic claims and, in particular, at 30% for claims valued at more than £5m is worrying. It is clear that catastrophic injuries have been particularly affected by rises in multipliers, fuelled by rising life expectancy and falling discount rates and also by increasing awards.

These claims have also been particularly affected by the fragmentation of familiar heads of loss and the development of newer heads, such as assistive technology. A decade ago a care claim would be just that, a claim for care alone. Now we have professional and family care, manual-handling training, case management and the addition of team leaders into the package.

But the report does contain some good news. It shows that insurers' concentration on proactive and consensual handling of catastrophic claims have paid dividends with settlement times falling, claims being identified more rapidly and ultimate liabilities being established more quickly. The key focus going forward will be to match these improvements to containing claims spend.

Looking forward, the legal report concludes that the government's stated intention to curb the high cost and lengthy delays in personal injury litigation is likely to dominate developments. The Ministry of Justice's proposals on claims process reform - should they be implemented - would reduce front-loading of costs, particularly when coupled with the proposed fixed legal costs and fixed success fees. The MoJ's paper on damages law reform will, however, further strengthen the key trends of the last 10 years - especially government claw back.

On the subject of periodical payment take-up, the legal working party concluded that this is likely to remain low, at least in the short term. It will also depend on the claimant's perception of their ability to achieve investment returns in excess of whatever index is set by the court. Should the appeal courts conclude that indices other than the Retail Prices Index are to be used, government assurances that periodical payments will be cost-neutral for the insurance industry are likely to ring hollow.

The common theme in each of the Bodily Injury Awards Studies is the rise in the expertise of all parties involved in bodily injury litigation. This trend is likely to continue.

Legal services market

The field is also likely to become less predictable with the opening up of the legal services market planned by the Legal Services Bill and the continued rise of claims management companies. The Bill, which should become law shortly, will allow outside investment in and ownership of law firms. Greater resources and reach are likely to result in increasingly powerful brands, backed by effective advertising. These developments may well result in greater capture of claimants and hence more frequent claims.

The trend of rising claims inflation and legal costs, demonstrated in the three earlier reports, also shows no sign of abating. The recent, small downturn in the rate of increase may well be regarded in the future as simply a blip, if the government moves to enforce full claw back of medical and social care costs - as heralded in its recent consultation paper on damages reform. The only glimmer of hope lies in relation to legal costs for lower value claims. If the government is serious about fixed legal costs, the promise of costs control which the Woolf reforms left unfulfilled may yet be met.

Paul Parke is an injury risk partner at national commercial law firm Beachcroft, a member of the legal working party for the Fourth Bodily Injury Awards Study and co-author of its report.

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