Constitutional Affairs Committee
Evidence submitted by Thompsons Solicitors - December 2005
Real Injuries, Real People
The Perception of a Compensation Culture
The Insurance Industry
Employers Liability Insurance
Personal Injury Claim System
Conditional Fee Agreements
Deductions May Creep Back
Creeping Post Hoc Rationalisation
Limiting Use of Experts
Encouragement of Before The Event Insurance
- Thompsons provides a wide range of free services to trade union members.
- Extensive use of CCFAs.
- CCFAs have enabled the union movement to offer entirely free personal injury cover to their members and their members’ families.
- Compensation culture does not exist.
- Insurers exploiting the notion of compensation culture to push for regressive change in the handling of personal injury claims.
- Personal injury case intake substantially down.
- Legislating to deal with the perception of compensation culture is entirely illogical.
- The law on negligence does not need clarifying. It has been laid down for years and is understood.
- Firms, but not trade unions, that refer people and advertise CFAs should be subject to regulation.
- A snapshot of the financial health of Britain’s largest general insurers shows their profits going up, not down.
- The ELCI crisis was brought on the insurers by themselves.
- No empirical evidence to justify the insurers’ claim that 40% of costs are lawyers fees.
- Delay is substantially down to insurers, not claimants.
- No demand being made of insurers to reward employers who have good health and safety practices.
- De-lawyering the litigation process results in unfairness and under-settlement.
- A system where the defendants determine who the claimant may have as their expert undermines the fairness of the system.
- Insurers are losing the challenges they bring to what they claim to be disproportionate costs.
- The use of a computer system for damages assessment is both absurd and potentially dangerous.
- BTE insurance is bolted on to policies without the insured’s permission and places the lawyers running cases under immense pressure to settle as quickly as possible, at a low sum.
- Increasing the small claims limit only suits the insurers.
- Restricting access to justice by removing the right to representation runs the risk of political and industrial alienation.
Thompsons is the UK’s most experienced Personal Injury (PI) law firm, with offices across all 3 UK jurisdictions. We have around 70,000 cases at any one time, the majority of our cases are for trade union members (and their families). Throughout its 85 year existence Thompsons has refused as a matter of principle to act for defendants. We believe we are uniquely placed to comment, from the claimant and trade union member perspective, on the issues being considered by the Committee.
Thompsons and its union clients operate free legal assistance schemes. Trade union members and their families can take advantage of a range of legal services from personal injury cover, through free legal advice on non employment issues, to employment law advice and representation and even wills and conveyancing.
Almost all the services (save conveyancing which is at a highly competitive rate) are offered free. In personal injury cases the unions use specialist law firms such as Thompsons. Since the introduction of Collective Conditional Fee Agreements (CCFA’s) it has been possible to guarantee no deductions at all are made from the compensation, whether or not the claim is successful.
We back the unions’ comments, which refer members and advertise their legal services, that they should not be subject to regulation. Although this evidence is to the Committee’s inquiry on compensation culture, Thompsons believes that the inquiry on small claims is equally fundamental to the debate around compensation culture. This is all part of a general acceptance of “crisis” in the personal injury (work and non work) insurance market and is part of an insurance driven agenda to limit their expenditure by limiting claimants’ access to independent advice.
Thompsons believes that the right of individuals to receive damages if they have been injured due to negligence and their right to representation is under threat.
Over the last ten years negligent employers have paid out over £3 billion in compensation to staff who have sustained physical and psychological injuries at work. This figure may appear dramatic, but it reflects the seriousness of the issue of workplace health and safety. Much of this compensation has to be fought for through the legal system.
Here are some examples of the sort of people that Thompsons represents on instruction from the unions.
Mrs F, a nurse, fractured her toe when injured at work. Her claim settled for £1,050. The claimant has been very nervous of the litigation process and would not have made the claim without the backing of her trade union and the legal assistance it provided.
Mr M, employed as a patient shuttle driver by an NHS Trust, was assaulted at work by a volunteer ambulance driver. He suffered a broken rib and a bump on the back of his head. The case was complex due to the issue of liability and the difficulty in obtaining documents about the assailant. The claimant had some difficulty understanding the legal process, and without legal representation from his union he would not have pursued the case beyond the initial denial of liability by his employer.
Miss B was travelling on a London bus when the driver closed the doors on her foot, ripping the nail off. She was off work for a week and a half. Initially she corresponded with the bus company herself and they made an offer to her of £1,000. On consulting Thompsons she discovered she could also claim for her loss of earnings and also that she had a contractual obligation to repay sick pay to her employers in the event of a successful third party claim. She has been advised that the claim is worth in the region of £2,000.
Compensation culture does not exist in Britain. The Better Regulation Task Force said so, and the government’s own statistics show that the number of personal injury claims are down. Employers liability claims dropped 20% last year.
There may be a host of reasons for this drop in cases. The drop may be a reflection of better health and safety or of the move from more traditional industries to less dangerous occupations. It may reflect less union density. There may be an impact from the proliferation of claims companies. People may actually be being turned off making a claim by the whole notion of a compensation culture as it involves making a fuss and is as such inherently “un-British”.
Unfortunately, the decline in claims does not mean that there are fewer accidents. Health and Safety Executive statistics suggest some reduction in accidents but not of this magnitude. We have been working with the unions to raise awareness of trade union legal services and people’s rights to claim. Our view and the unions’ view is that people should not have to suffer in silence and that poor health and safety practices should be exposed and corrected.
We carried out a nationwide survey of 500 people. This suggested that there is widespread ignorance of the right to claim and that people believe more should be done to increase awareness of that right.
- lead in raising awareness of people’s rights to claim.
- 85% of employees questioned believed that more should be done to inform workers of their rights to claim if employer negligence has caused them to be injured.
- This figure rises to 91% in the manufacturing and construction industries, and, regionally, to 93% in Greater London, and 94% in Northern Ireland and Wales.
- The majority of respondents listed three key players - trade unions, government and employers – as needing to take the lead in raising awareness of people’s rights to claim.
The Committee has heard from the Lord Chief Justice that in his view there is no compensation culture. The same has been said on numerous occasions by the Lord Chancellor.
As it is clear that there is no compensation culture in Britain, the Compensation Bill describes compensation culture as “a perception” and suggests that it is necessary to legislate for this perception. This is an entirely illogical position. If people started to keep guns to protect themselves against a perceived threat of burglars the government would publicise statistics and call on individuals not to rise to hysteria.
In its reaction to Anne McIntosh's Private Members Bill on the right of householders and shopkeepers to use greater force against burglars, the government showed its distaste of responding to perception rather than fact. And yet responding to a perception is exactly what the government is doing with compensation culture.
When people have started, without justification, to panic buy petrol and there are queues at filling stations the government has sought to inject a sense of realism and calm. It has not pandered to the panic and inflamed it. And yet with its reaction to the perception of a compensation culture, peddled by the insurers and the media, it is behaving as the worst panic buyer.
Thompsons can offer the Committee many examples of how the media uses compensation culture to describe almost any compensation claim. One recent one was a particularly serious distortion of the facts.
Gavin Bassie, a fire-fighter, suffered a catastrophic knee injury in a fall during a PT exercise on a dusty floor that ended his 13-year career. The press and the Merseyside Fire Authority, have sought to present the case as compensation culture, when it is in fact anything but. The Fire Authority was in breach of the Health and Safety at Work regulations.
Mr Bassie originally offered to settle his claim without recourse to lawyers, for £40,000. By refusing to admit liability and by defending Mr Bassie’s claim all the way to the Court of Appeal, the Fire Authority has been landed with a £200,000 bill for damages and costs.
The Court did not believe the Fire Brigade’s witnesses, and criticised them heavily for the way in which they investigated the accident.
However, the court did not suggest that anything onerous needed to be done to prevent further similar accidents. The floor simply had to be cleaned before PT exercises.
Yet the chief fire officer has sought to hide his Brigade’s failings by a gross over-reaction including a running ban and staging a media campaign which seeks to present Mr Bassie’s claim as more evidence of compensation culture.
He has also attacked the right of fire fighters to claim compensation when they have been injured as a result of their employer’s negligence and claims that the case will lead to cuts and a recruitment freeze.
This is just one example of how the notion of a compensation culture leads to unnecessary risk averseness in public bodies. Rather than a genuine fear of claims, compensation culture is being used as an excuse to attack claimants and shape policy. The government should condemn such reactions rather than fuel them by attempting to legislate against a perception.
The Bassie case is also evidence of why the law on negligence does not need to be changed or clarified. The law has been set down for years. It is perfectly understood by those who need to understand it. Employers and insurers will however always deny negligence when they defend a case. That is nothing to do with the law being unclear. Attempting to change or clarify it will simply result in more money for lawyers to argue what it means.
The debates around compensation culture and raising the small claims limit are insurance industry driven. Legislating against a ‘perceived’ compensation culture, or cutting lawyers out of the claims process suits only the defendants.
The insurance industry is a major employer, a major income generator and as such a major part of the UK economy. Insurance impacts in one form or another, on virtually every household in the country. It is understandable therefore that when the insurance industry speaks through the Association of British Employers (ABI) or individually, people in government listen.
A snapshot of the financial health of Britain’s largest general insurers
Aviva is the world’s sixth largest insurance group and the biggest in the UK. It’s main UK brands are Norwich Union, Norwich Union Direct and the RAC.
Aviva Group’s operating profit before tax for 2004 was £2.3 billion, up from £1.9 billion in 2003 and £1.7 billion in 2002.
Royal Bank of Scotland Insurance is the second largest general insurance provider in the UK. It’s subsidiaries include Direct Line, Churchill Insurance, Green Flag and NIG.
Operating profit for the RBS Group as a whole was up 15 percent from £7.1 billion in 2003 to £8.1 billion in 2004. In 2002 its profits had risen 12 per cent to £6.4 billion.
AXA became a major UK insurer in 1999 when it acquired Guardian Royal Exchange through its subsidiary Sun Life and Provincial Holdings.
In 2004 its UK insurance value by gross written premium was £1.9 billion. Its UK general insurance business posted a revenue increase of 4.3 per cent to £3.1 billion, that itself up from £2.9 billion in 2003.
Allianze is one of Europe’s largest financial services companies. In March 2005 it released a breakdown of its performance in the UK for the first time, showing that pre-tax profit for its UK division rose 56 per cent from £145 million to £227 million in 2004. Operating profit rose to £218 million, against £159 million in 2003.
This snapshot shows just how profitable the insurance industry is. If its profits are being hit by rising costs in PI claims, then that is not reflected in the evidence we have found.
Insurance industry profits make it a very powerful lobby group. The risk is that what it says becomes fact.
The perceived “crisis” in Employers Liability Insurance (ELCI) led to the abortive Department of Work and Pensions (DWP) pilot. Premiums were soaring and “something” had to be done.
The fact was that – as the appended article by the former Editor of the Insurance Times makes clear – there had been an irresponsible race to the bottom on ELCI premium prices. We were, in the UK, massively out of step with the rest of Europe on premium rates. But instead of a thorough investigation as to why ELCI was going up to such an extent, there was a push for significant changes to be made to the way in which claims were dealt with.
Unrealistic premiums, combined with factors that suggested insurer incompetence rather than anything else, led to the problem that the DWP sought to tackle.
The insurers had been exposed on asbestos claims. If they had properly read the clear signs from the early 1900’s they would have realised that this was a disaster waiting to happen. Insurers had also had their fingers burned in the late 1980’s stock market crash and were seeking to recoup some of their losses from natural disasters.
The “crisis” in ELCI had little to do with the ELCI market or the PI claims process and everything to do with insurer incompetence and having to pay out on policies they naively assumed would not lead to claims.
The ABI has complained that costs in personal injury cases are soaring. They say that the current protocols that set down clear rules and timelines for both parties to follow are not sufficient for the efficient (i.e. speedy) disposal of cases. The ABI claims that 40% of costs are lawyers fees.
Yet the UK court system actively prevents solicitors from running up unreasonable costs and encourages challenges to any that are unreasonable. The ABI has offered no empirical evidence to justify its 40% figure despite Thompsons and others having repeatedly disputed it and asking them to produce the facts behind the figures. It is notable that this figure bears no relation to Thompsons figures on case costs notwithstanding that we are the largest trade union personal injury firm in the UK.
We dispute the reliability of the ABI’s figures. Even if they were correct then questions would need to be asked about what is responsible for them. In Thompsons’ experience it is the changes that insurance companies have made to their methods of claims handling over the past 5 years. In order to cut costs, they have “dummed-down” by doing away with the old style claims inspectors who would discuss claims and settle legitimate ones quickly, leaving instead an insufficient number of experienced claims handlers.
Insurers could simply follow protocols and respond to claims more quickly rather than, in our experience, often only responding to a claimant’s solicitor after court proceedings have been issued. In that way claims could be progressed to a speedy conclusion, with minimal costs.
Both issues have been transmogrified into fact. This is what has happened with the compensation culture and the alleged ‘facts’ that back that up. No one is turning the tables back on insurers and questioning their motivation.
And no one is demanding any return from the insurers for any of the change that they seek to impose. There is no request for a guarantee from the insurers that change in their favour, which must lead to savings, will be made public and passed on in the form of reduced premiums (which would in turn encourage good practice by employers). If we believe in the principle of the Polluter pays then those who do not should surely be rewarded.
The committee is examining the way lawyers’ fees are arranged, in particular Conditional Fee Arrangements. It is significant that the impact of these are being considered at the same time as the furore around deductions from damages by compensation claims handlers generally, and by some firms handling coal miners’ claims under the health coal scheme.
Since their introduction Collective Conditional Fee Arrangements (CCFAs) – CFAs for membership organisations - have allowed trade unions to provide high quality legal services free to their members. To enable trade unions to take on the immense power and seemingly bottomless coffers of the insurance industry, unions had to make deductions from members’ compensation. This ensured that the unions had the funds to pay for the level of expert representation that members should reasonably be able to expect. CCFAs have allowed the trade unions to move away from deductions and offer a wholly free service.
The furore that has surrounded the deductions made by some areas of the NUM in the coal health scheme shows how sensitive the issue of members not getting 100% of their compensation really is.
There are sound and valid reasons why areas of the NUM have made deductions. The practice started in 1993 in Durham, for example, when the last pit closed. With no pits and no membership income the union had to secure funds to allow them to continue operating.
In mining communities, the union operates as a social welfare organisation, often as the first port of call for former miners, their families and dependents rather than the local authority or Citizens’ Advice Bureau.
In the Durham coalfield the Durham Miners Association has 9,000 members and represents 3,000 next of kin. There are 15,000 retired or redundant miners.
The voluntary deductions taken from 1993 were used to back the successful legal test cases, which led to the introduction of the Miners’ Compensation Schemes, and opened the door to more than 750,000 claims by injured miners, their families or dependants of deceased miners.
The money deducted now is being fed back into the mining communities in a variety of ways including delivery of social welfare services, provision of school uniforms, transport to and representation at Social Security and Medical Appeals Tribunals and delivery of the Concessionary Fuel Allowance scheme.
People who attack the deductions made on behalf of the NUM forget that the practice of making deductions from compensation payments was widespread in the trade union movement before the introduction of Collective Conditional Fee Agreements, enabling the Davids of the trade union movement to take on the Goliaths of the corporate and insurance world.
Any attempt by the insurance industry to limit when the cost of using lawyers may be recovered, by devices such as fixing costs and increasing the small claims limit, runs the risk that unions will be forced to reconsider how they fund their legal schemes.
It is possible that this is what the insurers want to achieve. By squeezing the ability of claimants to get funding for or even questioning the legitimacy of their having independent advice they may force all those not on one of their panels to make a deduction from damages. The claimant will be forced to make a choice between a service that whilst free is in the thrall and pay of the insurance industry or having a deduction made from their compensation.
Under the guise of tackling a compensation culture, or even addressing the perception of it, the insurance industry is making suggestions that are gaining ground and credibility.
Limited lawyer involvement
De–lawyering the litigation process is suggested by the insurance industry as the answer to any problems there may be with the current system. This is superficially attractive. Regrettably our experience of dealing with insurance company Intervention Units (departments within insurance companies whose task is to capture as many cases as possible from accidents and deal with them direct and without lawyer involvement), or of picking up the pieces for a claimant whose claim has been dealt with by a claims company is that it results in unfairness and under settlement.
People have their cases wrongly rejected completely (how does the claimant know they in fact have a case if no one is fighting their corner?) or under settled either in damages or because the medical evidence obtained is at the wrong level or from doctors on the payroll of the insurance industry.
Despite these risks, in the abortive DWP pilot and through recent proposals from the CJC, restricting claimant access to lawyers has been a significant and serious suggestion.
There is a suggestion that expert use should be limited either in the choice of doctor or the level of their qualification. This must start from the assumption that the level of expert at present is inappropriate. Yet despite the insurers under the pre action protocols having the opportunity to object to the choice of doctor in each and every case they rarely do so.
And experts, like costs, have to be proportionate to be recoverable disbursements. To allow a system where the defendants directly or indirectly determine who the claimant may have as their expert can only undermine the fairness of the system and harm the claimant.
It is true that in some cases there is a lack of proportionality of costs to damages. But no one seems to be looking beyond the superficial as to why that occurs.
The insurers repeatedly and publicly complain about a lack of proportionality and yet they have a significant weapon available to challenge any claim they consider to be unreasonable through the costs assessment process. In Thompsons’ experience when they do so (in over 50% of the cases) they end up either losing the assessments or conceding on a case by case basis that, in fact, the costs are both reasonable and proportionate and reflect their behaviour not the claimant’s representatives. The conclusion we draw from this is that it is precisely because their arguments continually fail when put under the judicial microscope that the insurers have opted to scream about proportionality from the political and media rooftops.
The typical claimant in a personal injury case is ignorant of what their claim is worth. If there is a perception of compensation culture, it is not held by potential claimants, who tend not to even be aware of what they can claim for.
There is a proposal that there might be the use of a computer system for damages assessment. This is frankly absurd. A computer can no more replace a Judge in assessing damages than it could replace a Judge sentencing offenders. Judicial assessment of damages has developed over years of experience and practice. It requires a degree of common sense and judgement that we all reasonably expect of the Judiciary. It requires consideration of competing and often apparently conflicting and partially reported authorities of differing levels of courts. It is not a mathematical exercise which can be done by pushing buttons.
If a computer system is the answer why have insurers not done this long ago in a way which wins over claimant confidence? They could have cut their own staff and made settlements quicker and more easily as all would have confidence in the system.
There is a parallel in the notion of a computer calculating damages to the tariffs which have been attempted and led to unfairness in the CICA scheme. Even that tariff scheme has not sought to introduce computerised assessment.
And at Thompsons, as claimant lawyers, we continuously remind ourselves that damages themselves remain – according to the Law Commission – massively out of step with what they should be in real terms.
In its August 2005 paper Improved Access to Justice: Funding Options and Proportionate Costs, the CJC suggested actively encouraging BTE insurance.
Most people will have three or four domestic insurance policies: for their car, their household contents, their property and perhaps an annual travel policy. On each they may have a bolt on BTE policy – attached without their agreement - for which they will have paid an undisclosed sum.
BTE is considerably more expensive to the community than union funding by After The Event (ATE) insurance, self insurance or commercial insurance. And yet it is being heavily promoted and bolted on by the insurers at every opportunity.
A union with 1 million members taking advantage of the CCFA regime and having an average self insurance premium of £340 supporting 10,000 successful cases in a given year would have a total premium income – to pay for the cases that are lost - of £3.4m.
By contrast if the average cost of a BTE premium is, say, £20 per policy per year, 1 million people will pay in the region of £60 million per year for before the event insurance that the majority will never need (trade union members certainly don’t need it) or use (it is poorly promoted when bolted on and has restrictions) and who most will not even know they have (who reads the detail of their insurance policies?). Even taking into account success fees, £60 million is a considerably greater cost to society than ATE cover and self insurance.
If BTE is encouraged to dominate the market, as the CJC suggests, ATE insurance will either wither or become disproportionately expensive. ATE insurance will only survive if it has a mixed basket of cases to support. It will not survive if it is forced to back only the more difficult cases that BTE lawyers reject.
Our experience is that BTE is, in fact, nothing more than a claims company arrangement for insurers, a way of capturing cases and profiting from them.
The cases are sold to panel law firms for a referral fee. The law firms are then often required to run the cases on an unlawful basis, i.e. no charge to the insurer if they win or lose. That means the claimant is misled into thinking they are insured when, in fact, the insurer’s price of panel membership is that the lawyer pays what the insurer should.
This arrangement is of great concern because of the position it places the injury victim in. This system bypasses the extensive consumer protection arrangements for CFAs set up precisely because of the concern to preserve complete integrity and impartiality of lawyers giving advice.
A lost case could mean a huge bill for a law firm without any insurance protection as could rejecting an offer and failing at court. The claimant is not told that his lawyers are carrying this burden when they advise him about the case.
Lawyers running a case on BTE will be under immense pressure to settle claims as quickly as possible and at a lower sum than they might otherwise have fought for in the light of the fact that they will:
- Have purchased the case from the insurance company and therefore have a sum paid out they will want to recover;
- Frequently be pursuing the same insurance company on behalf of the claimant;
- Not be paid at all if they lose the case.
We finish on the issue of raising the small claims limit as this is very much part of the debate about compensation culture. It is one of the aims the insurance industry would, using the smokescreen of the compensation culture, like to see pushed through.
It is something that the committee has already considered and we are conscious is not part of its brief for its current enquiry. Nevertheless the limit in small claims is of fundamental importance to claimants and the trade unions that represent them, and there are points that we wish to raise.
It is a myth that the limit has not gone up. Until 1999, the small claims limit of £1,000 were for general damages only. By including special damages, the limit was effectively increased by 25%.
£1,000 is not a “small” sum. It is a lot of money to someone on the minimum wage, for whom it represents over five weeks wages. Only 1/3 of people successful in a claim through the small claims court ever actually receive the awarded compensation.
Raising the limit will reduce the number of claims. Many individuals such as the three we featured at the start of this submission will not feel confident in making a claim without legal representation.
How will a claimant know that their case will attract £2,500 or more and so they should approach a lawyer? It can be a considerable time after an accident before it becomes clear that a claim is worth that much. There is no such problem with £1,000 as this is clear early on in a claim.
And if a claimant doesn’t know what the law is relation to issues such as reasonable practicability and foreseeability, they won’t know what evidence to gather to back their claim. Insurers regularly deny and misquote the law in order to escape liability. That is why a claimant needs a lawyer.
Thompsons carried out a survey of a thousand trade union members who had been represented by trade union legal services in a claim completed over the last year, in order to find out what value claimants put on being able to call upon advice from their union’s lawyers.
Of those surveyed, over 70 per cent of the cases were employment accidents, with the next most important case type being road traffic accidents, both at work and elsewhere
- Sixty four per cent of respondents in the survey received awards of between £2000 and £5000.
- Sixty three per cent of respondents would either not have proceeded with their case, or would not have felt confident about going before a judge without legal representation.
- Only a third of respondents believed their case would have been fairly dealt with if they hadn’t had a trade union lawyer.
- Ninety per cent of respondents said they would trust specialist solicitors appointed by a trade union, while less than 10 per cent said they would trust claims companies or high street solicitors.
- Nearly 85 per cent of respondents rated the service that they received from trade union solicitors to be either good or very good.
The right to representation, to access to justice, is fundamental to ensuring that everyone has an equal chance. We believe, as the government does, that people unable to protect themselves should be empowered. Removing the right to representation in ‘small’ claims, or any claim, creates an unequal fight.
At Thompsons we believe there is such a thing as society. If we cut individuals loose and leave them on their own against a powerful adversary, they will be politically alienated, angry and short changed.
If as a society we are trying to encourage better employment relations, what message do we send to individuals who have to take on their employer without representation? If they feel short changed or belittled what will they feel about the work that they do and the employer that they have?
16 December 2005
For further information:
Director of Policy
Great Russell Street
W 020 7290 0009
M 07976 574914
Soaring liability insurance premiums are not the fault of claimants, of ambulance chasing lawyers or of the no win, no fee legal system. Those myths have been smashed by all independent analysis of recent claims, admitted by the majority of insurers and stated categorically by government ministers. There is no claims culture. The reasons behind rising liability insurance premiums, in reality, are the madness of the market, the corruption inherent in big business and the feeble regulation of the UK insurance industry that allowed years of suicidal pricing as insurers sold policies at less than they actually cost.
If one name stands out as an example of all this it is Independent Insurance.
The Indie was run by Michael Bright, an ebullient character who saw the company grow rapidly to become a top ten UK insurer, winning awards for itself and for its ‘larger than life’ chief. In Mr Bright’s case, that larger-than-life description was a euphemism for a man who used his significant physical and psychological presence, aggressive lawyers and the manipulative power of his company’s huge advertising budget to ensure little criticism of him or his work was ever made public.
After the Indie spectacularly collapsed in the summer of 2001 even the supposed scrutineers of the system, the credit rating agencies such as Standard & Poor’s, and the firm’s actuaries, Watson Wyatt, the people charged with validating insurance company claims funds, came under fire for failing to act in the face of Mr Bright’s bravado.
What the Indie had done was to aggressively market itself as some kind of expert insurer, with such a specialist team of underwriters that it could offer businesses even lower premiums. It worked with a select group of brokers that it made feel both elite and privileged but also beholden to the company. Brokers not in the group wanted to be in and those in the group felt unable to leave. But all the time, the Indie was writing business at unsustainably low rates.
Its collapse was down simply to not having enough money in the bank to pay for all the claims. As the company began to realise its problem, the only way to get new cash was to win new insurance contracts. To do that, it had to undercut the opposition, even if that meant charging ridiculously low prices. It rapidly spiralled out of control.
The Indie’s price cutting dragged other insurers down with it as they fought to compete. But this is an industry that is used to what in other sectors would be known as below-cost selling. Insurers have for years sold policies at prices that in themselves make a loss. The Association of British Insurers’ figures for employers liability insurance in the last couple of years of the Indie’s life amply demonstrate this.
In 1999, gross written premium – the amount paid by employers – totalled £721m but the insurers paid out £814m in claims to injured workers. In 2000 it got worse. Employers paid a total of just £702m, a £19m reduction, while payments to workers injured through the negligence of their bosses totalled more than £1bn. That was quite simply down to suicidal pricing. A comparison of affordability made by the HSE showed that in 1999 employers liability insurance represented a lower proportion of the wage roll in the UK when compared to workers' compensation scheme contributions in other European economies.
Table: European Comparison, EL as a percentage of payroll, 1999
Country Contribution rates 1999 (% of payroll)
United Kingdom 0.2
Source: Greenstreet Berman - HSE report "Changing Business Behaviour"
So, for every pound paid to an injured worker the boss whose behaviour had caused the accident only paid 70p. No wonder it was cheaper to ignore sensible health and safety policies when companies were not even paying the full cost of the human misery they caused.
So how could insurance companies do this and not go bust? They took a gamble. They took the premiums at the beginning of the year and, in most cases, did not pay out claims until either later in the year or, more often, many years after. In the meantime they stuck these vast sums of money in investments, such as the stock market. With several years of growth, by the time they paid out their claims they had more than enough money not just to settle the bills but to make a healthy profit despite UK insurers making underwriting losses on liability insurance for every year of the decade to 2000. This is like a manufacturer selling goods at less than the cost of making them and then betting all the money on Laughing Boy in the 3.30 at Haymarket and declaring the business in profit when the horse comes in at two to one.
A series of events in 2001 turned the insurance industry on its head.
The liability insurer Chester Street went bust.
Hot on its heels the Indie collapsed.
The September 11 terrorist attack on the World Trade Center.
The stock market stopped rising
Interest rates fell
action by the industry regulator to stop further company collapses
September 11 resulted in the biggest insurance pay-out in history. Not only were insurers haemorrhaging money but the reinsurers – the companies that cover insurers against unusually large claims – were digging deep into their pockets for the last few coins they could find.
The insurance industry was suddenly skint. Instead of having billions invested, earning huge interest, the industry had, by comparison, just a few coppers. And it was a while before the insurers noticed what was going on with the stock market and interest rates, which meant that what little money they did have was earning them less.
And then the regulator, needing money to bail out those left stranded by the collapse of the Indie and determined to stop further collapses, demanded more money from insurers. And it insisted they keep more of their income in low-risk investments. Insurers suddenly faced the prospect of going bust unless they charged enough money for their products to actually make a profit.
This is what caused the panic. Insurers looked at who they were insuring and either ramped up the premium – doubling them year on year in some cases – or simply decided the business was just too risky to even offer cover. Insurers had been charging far too little for too long. Companies had little or no incentive to implement safe working practices and improved health and safety because it was cheaper to pay the ridiculously low premiums the insurers were offering than to make the safety improvements needed.
So rising employers liability premiums is a good thing for workers. It means bosses will have to pay the true cost of their negligence. The only way to secure lower premium will be through reducing the risks at work. That should act as an incentive to make workplaces safer and to drastically reduce the number and gravity of workplace injuries. The insurance industry’s suicidal pricing will no longer subsidise workplace accidents and corporate killing. And it is about time too.