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Data from Institute and Faculty of Actuaries shows legal fees reduce by 65% for whiplash-type third party injury claims 19 January 2015

Data from Institute and Faculty of Actuaries shows legal fees reduce by 65% for whiplash-type third party injury claims
19 January 2015

12% reduction in the frequency of bodily injury claims
19% reduction in the overall cost of whiplash-type injury claims
65% reduction of fixed legal costs for each claim made

The Institute and Faculty of Actuaries (IFoA) 2014 updated report into third party motor insurance damage and injury claims, highlights that 2013 legal changes have had a significant impact on motor insurance claims, with legal fees for whiplash-type third party injury claims reducing by 65% since the legal reforms came into effect. The IFoA report looks at third party motor UK claims from data collated across the motor insurance industry for 2013.

In the nine months following the implementation of the Legal Aid, Sentencing and Punishment of Offenders Act (LASPO) reforms, the cost of whiplash-type bodily injury claims has reduced by 19%. Before the reforms, legal fees accounted for 45% of claims costs, whereas now they appear to be around half of this.

Additionally the IFoA has observed a reduction of 12% in the frequency of bodily injury claims following the introduction of LASPO in 20131. This is also likely to be due to the implementation of the legal reforms, in particular LASPO, although there is uncertainty as to whether claim frequencies will be remain at this level.

The number of claims management companies (CMCs) has decreased over the past year by 35%, and this follows a drop of 24% in the previous year. This is in line with the reduction in turnover observed in these companies over the past year.

In the second quarter of 2014, motor insurance premium levels have fallen by 2.8%, and are 15% lower than the previous year. On average, premiums have increased by 2.2% per annum from 2008 to 2014 2.

There has also been a reduction in the number of serious injuries (a reduction of 6%) and fatalities (a 2% reduction). This is likely to have been driven by improvements in road safety, with the biggest reductions in Greater Manchester, Gloucestershire and the West Midlands.

David Brown, one of the authors of the IFoA report, comments,

“The effect of legal changes such as LASPO continues to be felt across the industry. This has not just meant a reduction in legal costs, but, at least for now, fewer claims being brought following a decline in the numbers of claims management companies.

“Partly as a result of the significant reduction in legal fees we saw for whiplash-type injury claims over 2013, there was an overall reduction of 19% in the cost of these claims post the legal reforms. While these reductions are good news, it is clear that they have already been anticipated by insurers in rate reductions up to Q3 2013. Such a benefit can only be expected to be a one off adjustment, and normal inflation means that consumers could see rates increase in the future.

“It was interesting to note that the reduction in claim frequency and costs appears to correlate with the introduction of legal changes and with a 35% reduction in the number of claims management companies, however, it is not yet clear what the impact will be of the increasing number of organisations offering ‘Alternative Business Structures’ (ABS). These structures allow insurance companies, brokers and accident management companies to refer clients to their own law firms, and generate revenue from legal services. There is certainly scope that these organisations may take up where claims management companies left off, and that we see a new surge in claims costs.”

Download short version of the report

De LSA op Vimeo

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