There is growing concern among insurers that recent changes to the UK personal injury industry by the UK government will prompt concern and confusion in the short term. There is no doubt that changes to the Ogden discount rate, a cap on some claims and increase in the small claims limit will force the UK personal injury industry to adapt. While the short to medium term outlook is difficult to predict, we have seen significant changes in years gone by and markets have always managed to digest them and then recalibrate what is required going forward.
Who Will Pay For The Change In The Ogden Discount Rate?
The severity of the Ogden discount rate change, from 2.5% down to -0.75%, was unexpected by even the most pessimistic in the industry and will hit the UK insurance market hard in the short term. This is the discount rate used to calculate compensation payments required to fund treatment and lifestyle changes for many years down the line. The change from 2.5% down to -0.75% will have a significant impact on the amount of funding required and the industry has not been slow in coming forward with criticism of the UK government.
The simple fact is that premiums will need to increase to cover the change in the Ogden rate so ultimately while insurance companies will take a short-term hit it will be consumers and businesses that will carry the long-term weight of this change. We should see changes in premiums start to emerge fairly quickly as the insurance companies have already completed their calculations about short to medium term shortfalls and how these can be addressed.
Small Claims Limit And Legal Advice
The UK authorities would appear to have looked at every angle of the personal injury claims industry with the idea of reducing costs for consumers and insurance companies in the longer term. Plans to increase the small claims limit is one which seems fairly innocent on the surface but if you dig a little deeper there are significant repercussions.
Non-road traffic accident personal injury claims of up to £5000, formerly £2000, will not now be covered by legal aid therefore any legal representation required will have to be paid for by the claimant. The idea is that increasing the small claims limit should speed up the whole process, reduce the cost of legal representation to insurance companies and also address the issue of borderline fraudulent cases.
As legal aid will not be available for claims up to £5000, with regards to non-road traffic accidents, a claimant would need to cover the costs of any legal representation. If you were pursuing a fraudulent personal injury claim would you be willing to put up the cost of legal representation and risk losing the case and your money? In many ways this is a subtle but very clever way of attacking relatively small fraudulent personal injury cases. Will it have the desired effect? Or will the fraudsters find a way around the new system?
The government believes that by increasing the small claims limit this will reduce the cost of legal aid which the fraudsters have been using to pursue their own ends. Even if just one in ten fraudulent personal injury claims fell by the wayside because of these changes that would be a good start to cleaning up the system.
Capping Claim Levels
There have been some significant changes in the capping of claim levels in relation to “minor road traffic accident claims” many of which were previously settled out of court often without any formal medical evidence. Under the old system, it was more cost effective for insurance companies to agree out-of-court settlements rather than be dragged through the courts with the additional legal costs. The new system announced by the UK government will significantly reduce compensation payments for “minor road traffic accident claims”.
To give you an example, for a road traffic accident resulting in an injury lasting up to 3 months the maximum payout would be £225 compared to an average payout of £2050 as set by the Judicial College Guidelines in 2015. There is a sliding scale covering the timeline of any injury with the highest rate reserved for the 19 to 24 month period where the maximum payout will be capped at £3725 as opposed to anywhere between £3630 and £6600 using the Judicial College Guidelines published in 2015.
While there is no suggestion that the legal profession has in any way been a participant in fraudulent applications, there is no doubt that a potential reduction in compensation for personal injury claims will change their attitude towards borderline claims. This in itself should again reduce the legal cost passed on to the insurance industry when a successful claim is put before the courts. In theory, this should place at least some downward pressure on premiums to combat rising costs in other areas.
Will Consumers Eventually Pay The Price?
The UK government is adamant that any increase in payouts because of the change in the Ogden discount rate will be offset by capping maximum payouts and reducing legal costs going forward. In theory this would seem to be a fair appreciation of the new system going forward but we will need to see at least a couple of years of actual figures to appreciate the full impact. It will be interesting to see whether consumers see any major change in their premiums whether this is for car insurance, business insurance, etc because in the past it has been felt that some insurance companies take advantage of confusing market conditions to increase their premium income.
One issue which has not really been covered is that of a potential fall in the number of fraudulent claims. If maximum payouts are introduced and access to legal aid is more limited then we could see some of the smaller fraudulent claims fall by the wayside. Not only would the fraudsters see a reduction in their overall personal injury claim payout, in the event of a successful claim, but there is the added risk of paying for their own legal advice within the new small claims limit. Is this a risk any fraudster would be willing to take on a relatively small amount of money?
The Fight Against Personal Injury Fraud Continues
While the fraudsters continue to dream up new ways in which to defraud insurance companies the fight against fraud continues. These changes by the UK government may well have attracted a mixed response from consumers and the insurance industry but slowly the fraudsters are being squeezed and made to reconsider relatively small claims – which have often led to out-of-court settlements with no medical advice sought or received.
There are now a number of TV programmes offering an insight into fraudulent insurance and personal injury claims. This type of exposure could prove priceless in the longer term because not only does it make the general public more aware of road accident scams and other fraud but also highlights how the fraudsters work.
It will be a constant battle between the authorities, insurance companies and the fraudsters but it is one which has the potential to save the insurance industry hundreds of millions of pounds a year which should be passed on to consumers. What other changes can we expect from the UK government in the short to medium term?