LEIG research paper on the recovery of After the Event Insurance Premiums, 14 November 2006
Legal Expenses Insurance Group
News Release : 14 November 2006
LEIG research paper on the recovery of After the Event Insurance Premiums
The Legal Expenses Insurance Group (LEIG) today published a research paper on the recovery of After the Event (ATE) Insurance Premiums.
Tony Baker, Director of the LEIG, commented: This latest LEIG paper has been prepared to record the main issues on recovery of ATE premiums so they are more widely available in the public domain.
With the formation of the LEIG in April, one of the areas of concern identified for action was the way in which the judiciary deal with the recovery of ATE insurance premiums. The ATE market is dependent on the recovery of reasonable premiums in successful cases to meet the objectives of the Access to Justice Act 1999. If this does not happen then the ATE market cannot function on a commercial basis.
There had been suggestions from some judges that only very modest, and possibly uniform, ATE insurance premiums should be recoverable following successful compensation claims. There were a number of arbitrary reductions of ATE premiums by judges at detailed assessments; it was clear judges were not aware of the actuarial principles behind the setting of premiums and had been reducing premiums to levels that seemed right to them.
This changed with the important Court of Appeal judgement on 31 July 2006 in the case of Rogers v Merthyr Tydfil CBC. The Court allowed the appeal and ordered that the full premium should be recovered. This was welcomed by ATE insurers.
Tony Baker added: It is expected that the judgement and guidance should now stop the large number of challenges to the full recoverability of ATE premiums. Indeed there are indications that insurers are now settling outstanding payments based on the judgement. This is very welcome.
The Court also gave guidance on how proportionality applies to these premiums and as to the approach which Courts should adopt in considering these sorts of challenges in future. Again this was most welcome.
The Group welcomes comments and contacts with other bodies including those with similar consumer objectives.
-ENDS -
Notes for Editors
1. A copy of the Executive summary is attached. The full paper is available on request.
2. The Legal Expenses Insurance Group (LEIG) was formed in April 2006 by a number of leading legal expenses insurers and intermediaries. The aim of the Group is to work together to protect and advance the rights of claimants to justice and fair levels of compensation. The following companies have to date joined the LEIG: Albany Assistance Ltd, Angel Assistance Limited, DAS Legal Expenses Insurance Company Ltd, LAMP Group Ltd, MSL Legal Expenses Ltd, Red Sands Insurance (Europe) Ltd and ULR Norwich.
It is estimated that members represent in excess of eight million motor legal expense policyholders and over 16 million policyholders in general.
3. Tony Baker has been appointed as Director of the LEIG tasked with setting up and establishing the Group. He is an independent consultant and non-executive director and a former Deputy Director General of the Association of British Insurers. His contact details are:
Tony Baker
Tel: 01920 465000
Mobile: 07725 462528
Email: thetonybaker@gmail.com
A jpeg picture is available on request.
4. Website: www.leig.org
Legal Expenses Insurance Group
Legal Expenses Insurance Group (LEIG) Comments and Information on the Recovery of After the Event (ATE) Insurance Premiums
Executive Summary
1. Introduction
1.1 The Legal Expenses Insurance Group (LEIG) was formed in April 2006 by a number of leading legal expenses insurers and intermediaries. The Group is working together to protect and advance the rights of claimants to justice and fair levels of compensation.
1.2 One of the areas of concern identified by the Group is the way in which the judiciary deal with the recovery of after the event (ATE) insurance premiums. If this is not on a commercial basis the ATE market, and access to justice by claimants, will be severely curtailed. The ATE market is dependent on the recovery of reasonable premiums in successful cases to meet the objectives of the Access to Justice Act 1999. If this does not happen then insurers may even stop writing business in cases of this kind. In addition, while there is uncertainty in premium recovery the underwriting of future business is more difficult
1.3 There has been a suggestion from some judges that only very modest, and possibly uniform, ATE insurance premiums should be recoverable following successful compensation claims. There were a number of arbitrary reductions of ATE premiums by judges at detailed assessments; it was clear judges were not aware of the actuarial principles behind the setting of premiums and had been reducing premiums to levels that seemed right to them.
1.4 There was an important Court of Appeal judgement on 31 July 2006 in the case of Rogers v Merthyr Tydfil CBC. The Court allowed the appeal and ordered that the full premium should be recovered. This was welcomed by ATE insurers. It is expected that the judgement and guidance should now stop the large number of challenges to the full recoverability of ATE premiums. Indeed there are indications that insurers are now settling outstanding payments based on the judgement. This is very welcome.
1.5 The Court also gave guidance on how proportionality applies to these premiums and as to the approach which Courts should adopt in considering these sorts of challenges in future. Again this was most welcome.
1.6 This paper has been prepared to record the main issues on recovery of ATE premiums so they are more widely available in the public domain.
2. Executive Summary
2.1 After the event legal expenses insurance (ATE) is purchased when a claimant has reasonable prospects of success in a claim for compensation but they do not have the benefit of before the event (BTE) legal expenses insurance or are not a member of a trade union or do not have sufficient means to fund the case privately or prefer to enter into a conditional fee agreement with their solicitor. In addition, ATE Top Up Cover is available where policies are taken out in sizeable claims where the BTE limit is exceeded. The insurance is usually marketed as a conditional fee agreement insurance.
2.2 If a claimant is successful the cost of the ATE premium should, under the Access to Justice Act 1999, be recoverable from the losing party. Legal aid was withdrawn for personal injury claims (other than clinical negligence) in 2000. The Act made the success fee, specific insurance premiums and the self-insurance costs of membership organisations recoverable from the other party.
2.3 There is a competitive insurance market for ATE business and this helps ensure premiums are kept at reasonable levels taking account of marketing costs, expenses, claims, administration and regulatory expenses and an element of profit.
2.4 The key issues critical to the assessment of reasonableness of any ATE premium are the relationship between the premium and the risk and the cost of alternative cover available.
2.5 A basic ATE premium might apply to cover one partys legal costs only when someone sufferers an injury in a road traffic accident that was not their fault.
2.6 This premium only covers the opponents fees and disbursements (e.g. expert reports) if the action is unsuccessful and the insured is ordered to pay them or fails to recover them from his/her opponent. The claimants solicitor would not normally receive any payment for their work if the case is unsuccessful and this, therefore, keeps down the cost of the insurance.
2.7 The premium needs to allow for all the items noted above plus the administration, finance, management, regulation, claims handling and reinsurance costs. In a high risk market, such as ATE insurance, a reasonable profit margin must be achieved.
2.8 These basic premiums would be for a fast track claim and additional staged premiums would usually apply if a case is contested and ends up in court. For an injury not caused by a road traffic accident, the risks and therefore costs are usually considerably higher and an average premium is usually about double. Again this would usually only apply for claims that are settled pre issue.
2.9 Are these basic ATE premiums fair, reasonable and proportionate? Insurance industry commentators have been suggesting for some time that ATE premiums are not at a level sufficient to sustain long-term sustainable profitability for those underwriting this business. This is evident also from looking at the insurers involved in this market. In the Rogers case, mention was made that the premium seemed too low.
2.10 Since 2002 half of the 22 providers no longer exist and 17 out of the 22 providers were affected by the withdrawal of major underwriters NIG and Lloyds from the ATE market. It could be argued that if there were big profits to be made from ATE business the big insurance groups, which write all classes of business, would be in the market.
2.11 What happens with ATE for a case that goes to court? These are the main ATE premiums that judges had, until Rogers, failed to appreciate and this is perhaps a result of them being aware of lower ATE premiums that apply before a case goes to court i.e. in the initial stages when a large percentage of claims are settled out of court.
2.12 There are two main types of ATE premium that might apply for a case going to court. First, some insurers quote a single initial premium and this takes account of the overall business that they take on. They look at their likely overall claims experience, selling, administration and regulatory costs and intended profit and set a uniform premium.
2.13 Roughly 65% of the cases that are insured may be settled pre-issue, about 30% settled post issue and 5% or so go to trial. The 5% that go to trial carry the greatest risk as up to 50% may be lost resulting in a large claim on the ATE policy (i.e. disbursements plus the costs of the defendant insurer).
2.14 With a single uniform premium the 5%, and to a lesser extent, the 30%, are subsidised by the premiums of the 65% of claimants whose claims are settled pre issue.
2.15 This is a perfectly reasonable business model for an ATE insurer and for those that sell/purchase such policies. However, this uniform premium of c£1,000 has been questioned by some insurers/judges who consider it is too high for cases that are settled pre issue. In a way they are right as within the c£1000 is a risk premium for those claims that are not settled pre issue. If all cases were settled pre issue then it would be possible to charge a lower premium. But the reality is different and the £1,000 can be fully justified based on the claims and administration costs of the ATE insurer.
2.16 An alternative ATE business model is to use staged premiums. These start form a low initial premium and it only increases if settlement is not reached and proceedings need to be issued. There are likely to be two further stages of premium i.e. for claims that are not settled at pre issue but are resolved post issue and those claims not settled post issue that go to court.
2.17 The staged premiums need to be very much higher than the initial premium if they are to pay a premium that is commensurate with the increased costs and risk. The risk being insured is the risk to the claimant of having to pay costs liabilities within the proceedings.
2.18 It is possible to calculate what the likely quantum of the costs liabilities is, and what the chances are in percentage terms of the risk of paying the costs. Once you ascertain those two elements you have the core ingredients from which to decide the relationship between the premium and the risk.
2.19 The potential adverse costs are straightforward to identify because the defendant puts forward a costs schedule at the end of the trial. In a case going to trial the total costs claimed may average £4,500/£5,500.
2.20 Own disbursements that are covered by the ATE policy may average £2,500/£3,500 (excluding the ATE premium). Total insured risk (excluding the ATE premium) is therefore on average about £8,000.
2.21 But what would be a reasonable ATE premium? Give the acceptance of risk at 50/50 the basic pure underwriting cost (i.e. the burn cost) for the recoverable premium would be £8,000 plus the ATE premium x 50%. If the ATE premium was £5,000plus IPT (£5,250) the calculation is £8,000 + £5,250 x 50% i.e. £6,625.
2.22 The above figures are before any administration costs or profit are taken into account. Whilst it is not the function of the court to audit the costs of an insurer, it is self evident that an insurers overheads will include underwriting costs, costs of meeting regulatory requirements, any commission paid, administration costs, and claims handling.
2.23 A significant profit mark up is appropriate together with cover holder commissions, making a total of c50%. This is supported by various court decisions.
2.24 On virtually any analysis therefore, a third stage premium of over £6,000 is reasonable. Taking the £6,625 average figure (above) the pure burn insurance cost and adding a profit/commission mark up amounts to £9,780. The premium may need to be very much higher in very complex and lengthy cases or where several parties are involved.
2.25 Another argument used to limit recoverable ATE premiums has been the cost of alternative policies. There have been cases where material has been used from a publication called Litigation funding. This is in error. Litigation Funding had been discounted by the Senior Costs Judge in the First Assist Test Cases as providing any reliable information as to the cost of alternative cover.
2.26 In the Rogers v Merthyr Tydfil CBC, the Court of Appeal agreed with the views previously expressed by Master Hurst that production of generalised material such as that found in Litigation Funding - upon which the Defendants had relied - was of no assistance in determining the level of premium which should be allowed. In essence, the Court accepted that if a solicitor acted reasonably in selecting a reputable ATE insurer for his clients, that will usually be sufficient to enable recovery of the premium charged.
2.27 Finally, when assessing premiums, defendants only look at proportionality in relation to damages obtained. How can an ATE premium of, say, £6,000 be justified when damages awarded are only, say, £4,000? As explained above this is not an appropriate or correct measure in assessing reasonableness and proportionality. The level and extent of the cover provided (Costs Practices Direction Section 11.10) is the key factor in confirming that proportionality is not a valid argument.
2.28 For the Access to Justice Act to work as intended and allow claimants access to justice, then it is imperative that adequate ATE premiums should be recoverable from the losing party if a claimant is successful. They should not have to fight case by case at detailed assessment with all the associated costs and delays.
2.29 If the full premium is not recovered then this will curtail the ATE insurance market and reduce access to justice for claimants. It will result in many people going uncompensated or under compensated where they suffer personal injuries when someone elses actions or negligence has led to loss or a personal injury.
[The full paper is available from thetonybaker@gmail.com]
Legal Expenses Insurance Group
14 November 2006
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