As the credit crunch bites, the claims sector is going to inevitably go through a period of uncertainty - but does the industry have in place the suitable infrastructure, policies and culture to tackle the challenges it will face in the years ahead? Terry Renouf and Alistair Kinley offer their insights
It is all too obvious from the events of recent weeks that the spectre of uncertainty hangs heavily over the financial services sector in the UK and beyond. In respect of the general insurance claims sector, the economic uncertainty is compounded by ever-present concerns about complex emerging risks and inflationary costs.
Against this somewhat sombre backdrop, what are some of the main issues for the sector and how might it find assistance in a straightforward, principles-based approach to these challenges?
Some two and a half years ago, then Prime Minister, Tony Blair, delivered a speech in which he commented that: "Increasingly, there is a hopeless mismatch between the global challenges we face and the global institutions to confront them."
Regardless of what views one might have about Mr Blair's politics or his style of oratory, his phrasing seems remarkably prescient given the current economic climate, dominated by the ongoing fall out from the so-called credit crunch. One might usefully frame a similar question in respect of the claims sector. Is there a hopeless mismatch between the challenges it faces and the institutions and structures that exist to confront them? And if there is, what sorts of measures might be necessary to address the mismatch?
The challenges for claims
In order to establish whether or not such a "hopeless mismatch" exists, one ought first to ask what are the present challenges for claims and the structures for tackling them? There is a long list of the former, which range from systemic and infrastructure risks identified in the aftermath of the floods of summer 2007 to the risk of political reversal of decisions of the appellate courts, as characterised by the continuing scrutiny in both Holyrood and Westminster of the unanimous decision of the House of Lords in the pleural plaques test cases.
Staying with asbestos issues, some anticipate that the recent death of Labour backbencher John MacDougall due to mesothelioma may spur Ministers into re-examining how further to improve the process for compensating claims relating to this aggressive asbestos-related cancer. At the same time, the Health and Safety Executive is reviewing its own estimates of mesothelioma rates in the UK and our perception is that it may find that its present modelling may underestimate the prevalence of the disease.
No less significant challenges elsewhere include engaging with the Ministry of Justice and claimant lawyers in reforming the process for low-value motor injury claims, dealing with the Financial Services Authority and Competition Commission investigations into payment protection insurance and implementing the recommendations of the Hunt review to make the Financial Ombudsman Scheme more accessible and transparent for consumers.
Other challenges arise from proposed new legislation and include changes to the laws on personal injury damages and limitation, expected to figure in a draft Civil Law Reform Bill due to be introduced during the next parliamentary session. In the medium term the Law Commission will propose one draft bill reforming insurance contract law and will work on another to reform the nature and extent of the liability of public sector bodies to individuals, in both negligence and administrative law.
Another piece of new legislation, the Equality Bill, will consolidate the main existing anti-discrimination duties and also introduce greater transparency about equal pay issues. Controversially, it will also seek to impose certain duties of positive discrimination, in the public sector at the very least. This suite of reforms brings the prospect of both substantive and satellite litigation which is likely to trouble conventional employers' liability providers as well as specialist markets in employment practices liability and directors' and officers' policies.
EL and D&O underwriters also face the interesting prospect of potentially indemnifying criminal defence costs in the sadly inevitable event of the first few prosecutions for the new offence of corporate manslaughter (corporate homicide in Scotland). On the one hand, the very good news is that HSE is reporting a reduction in workplace fatalities - albeit there are still over 200 such deaths each year. On the other, the penalties organisations may face on conviction for the new offence are likely to be very steep indeed, with fines being proposed at up to 10% of annual turnover. Fines of that level would hit hard in the present financial climate.
Which brings us full circle back to the credit crunch. The current financial downturn will of itself lead to new claims and notifications, not all of which may be genuine. This point was well captured by Paul Nunn, head of exposure management at Lloyd's, who this August said: "We know there's a correlation between recession and claims activity but quantifying that impact is difficult. It's not that we wish to ignore it, it's just very challenging."
The above is simply a snapshot of certain challenges. There are other significant issues out there - from the macro-level challenges of climate change and the ageing demography of the UK, to the micro-level problems of opportunistic fraudulent claims and the ever-present inflation in personal injury claims.
Controlling legal spend is another ever-present in all claims disciplines. Perhaps the recent MoJ consultation on costs capping orders and the continuing scrutiny of "no win, no fee" deals may offer some prospect of bringing some discipline to costs. Jack Straw MP, secretary of state for justice, told this year's Labour party conference that "the behaviour of some lawyers in ramping up their fees in these (no win, no fee) cases is nothing short of scandalous. So I am going to address this and consider whether to cap more tightly the level of success fees that lawyers can charge." Nothing is straightforward in politics of course - not even a distaste for "scandalous" legal fees - and in response, however, Mr Straw's Conservative shadow Nick Herbert MP retorted that "While Jack Straw grandstands with a promise to crackdown on 'no win, no fee' schemes, the Labour Party is pocketing cash from personal injury claims."
Facing the challenges
Having reviewed these challenges and reflected on Mr Blair's theme, what then are the "institutions to confront them"? More significantly, are they hopelessly mismatched to the present conditions and issues? In our view they are not for three principal reasons.
Firstly on the subject of reputation and treating customers fairly, insurers have long been delivering on promises in policies at the point of claim - widely recognised as the moment of truth for the customer. With the embedding of TCF in the regulatory regime, this issue has reached CEO and board level. It is surely no coincidence that reputation - of which TCF is a key measure - is among the highest concerns identified in the leading annual risk surveys.
The parliamentary and ministerial reviews of the response to the 2007 floods also brought reputation and TCF further into the political arena. The Hunt review of FOS and its implementation could push TCF issues in respect of third parties - most often personal injury claimants - up the agenda. Resolving the high costs associated with low value motor claims could also lead the industry to consider TCF as a promise to these third parties, and possibly to offering them access to FOS.
These are very clearly controversial and difficult issues, and likely to change the dynamic in the relationship between insurer, insured and third party claimant. The reality, however, is that these issues are already in play in today's public affairs agenda: in the Law Commission's review of insurance contract law, in reforms to third party rights against insurers which will figure in the draft Civil Law Reform Bill and in the so-far low key regulatory scrutiny of 'claimant capture' in low value motor injury cases.
Secondly on the issue of risk intelligence, the tools and models available for predicting risks have proliferated in the last decade or so. Most notably, the modelling of natural catastrophe risks has become virtually embedded in property programmes. Various models, often developed by reinsurers or consultants, are widely deployed, well known and understood in that market sector (windstorm models are among the best known).
The actuarial expertise behind such models is very obviously adaptable to motor and casualty risks - surely it is axiomatic that better initial data on risk frequency and severity must lead to more accurate claims reserving and - via the claims development curve - to a better understanding of exposures and pricing? Certainly on the motor book, the utility of actuarial insight and modelling of injury claims has been clearly demonstrated by the use among both the underwriting and claims disciplines of the four detailed International Underwriting Association/Association of British Insurers bodily injury studies which have been completed in the last decade or so.
Finally, regarding test case litigation, insurers and other compensators - notably in the personal injury field - have organised themselves around a number of important test cases in the motor and casualty field in recent years. Topics include credit hire, no win no fee and points arising in respect of asbestos-related diseases.
Not all have been successful and in fact many have failed to establish the legal outcome sought by the defence. Despite that, we detect in such cases (and we have been involved in several) a trend in which the defence sector is notably better organised than say 15 years ago.
Litigation risk and uncertainty will always be a variable in each and every case we handle. Consequently we appreciate that at a strategic level, test litigation to resolve market level concerns (say around credit hire matters or, equally topically, pleural plaques) may very well afford a more efficient method of resolving the uncertainties. While such test cases often group together several representative claimants, the outcome technically binds only those named in the litigation. Recent proposals from the Civil Justice Council on collective redress could very well assist in delivering a wider resolution.
Tony and Goliath?
In the speech quoted above, Mr Blair talked of a "hopeless mismatch" between the challenges and the institutions in place to tackle them.
We do not quite share his implicit pessimism - in respect of claims issues at least - even given the present credit crunch. Granted the evolving fiscal and economic environment presents clear and present risks for claims executives (and for boards and shareholders) and their legal advisers alike.
Nevertheless, we suggest that the tools to match the present challenges in the claims sector are perhaps far from new, and may for the most part be captured within the three principles set out in the second half of this article. In summary these are: deliver on a promise; understand and manage your exposure; and pursue your best points resolutely.
- Terry Renouf is national senior partner and Alistair Kinley is head of policy development with law firm Berrymans Lace Mawer.
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