insurance leaders autumn 2013

INSURANCE leaders autumn 2013 1

leadersINSURANCE

published by pain in the neckby Rob Cummings, ABI

catcher if you canby D.I David Hindmarsh,The Metropolitan Police

q&a with Amanda Blanc, AXA

cognition: minding risks

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2013

INSURANCE leaders autumn 20132

welcome

In this issue of INSURANCE leaders we hear from two British Insurance Award winners: Amanda Blanc, CEO of AXA

Commercial Lines and Personal Intermediary, shares her views on professionalism and Dave Hindmarsh D.I. gives a flavour of the 25 million reasons why the efforts of the Metropolitan Police were recognised by the BIA judging panel recently.

We also take a look at Lloyd’s recent ‘Cognition – minding risks’ report, which examines the psychological influences and subjective decisions faced by underwriters and consider how insurance products are evolving to protect businesses following what has been deemed ‘the biggest cyber-attack in history’.

We take a look at how the intellectual capital of the Victorians continues to underpin many transactions in today’s insurance market and Rob Cummings, motor insurance policy adviser at the ABI, and a number of other leading industry figures share comment on the implementation of the civil justice reforms.

Many thanks to all of our contributors,

Ruth Lawrence Partner & Head of Insurance Hill Dickinson LLP

Hill Dickinson offers a comprehensive range of legal services from offices in Manchester, Liverpool, London, Sheffield, Piraeus, Singapore and Monaco. The firm has more than 1350 people including 175 partners.


contents

q&a with Amanda Blanc

consequences: expected and unexpectedby Nik Rochez

the industry’s pain in the neckby Rob Cummings

the art of cyberwarby Jamie Monck-Mason

catcher if you canby D.I David Hindmarsh

cognition: minding risks by Mario Weick, Tim Hopthrow, Dominic Abrams and Peter Taylor-Gooby

the reform of insurance contract lawby Rhys Clift

new ‘careless driving’ fixed penaltiesby Derek Millard-Smith

coming up for air by Alison Moss

doom and gloomby Ruth Lawrence

science of risk prizeentries are now being accepted

view from the marketkey questions answered by our expert panel

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We speak to Amanda Blanc, CEO of AXA Commercial Lines and Personal Intermediary.

I think as a whole, the industry is responding very positively.

Interview by Michelle Hurst Di Pasquale


q. Who are you and what do you do?Amanda Blanc, CEO of AXA Commercial Lines and Personal Intermediary.

q. What do you see as the biggest challenge facing the insurance industry in the next 12 months?Regardless of whether we in insurance think it is fair or not, our reputation as a sector has been dragged down with banking and the other financial services. Consumer confidence in what we do is at an all time low. As a starting point, consumers tend to think we are out to fleece them and you can understand that based on what they see in the media.

We’ve also had our own issues around PPI and rising motor premiums as a result of our growing compensation culture, so we are not immune to this. We really have a job to do in improving and managing our reputation, but I wonder if some in our industry realise just what a big job that could be.

q. How well is the insurance industry responding to the civil justice reforms reforms? Will the reforms have a positive impact upon the claims culture?I think, as a whole, the industry is responding very positively and most insurers are fully contributing through the ABI and individual company representatives to devise the implementation and the detailed process rules.

The principle behind it has to be positive as the reforms will bring stakeholder focus to the process and provide opportunities to significantly reduce legal costs.

But let’s not get too idealistic about this. There are significant financial implications for organisations across the market, so I expect we will see attempts to find

‘compliant’ ways and this is already happening, to maintain income levels. I don’t think we have seen this fully settle down as we may see a number of changes over time to close emerging loopholes that frustrate the original principles of the reforms

q. What is your proudest career achievement to date?Being appointed to my current position was a real high point. But undoubtedly my proudest professional achievement to date was being elected President of the CII. It is a real honour to be permitted to represent the CII at that level and real recognition of your achievements and abilities. One of the real highlights of my tenure was being given the platform to push the professionalism agenda. It is something that means a lot to me personally and is a very important part of how we do business at AXA but to be able to discuss it on a much broader level was very satisfying.

q. Why is this professionalism initiative so important to you?It’s got to be a starting point in this day and age. It’s 2013 for goodness sake! As an industry, we can’t keep polishing the veneer and pretend it’s OK for us to continue operating in a way that, let’s face it, hasn’t changed fundamentally since the 1980s.

The way remuneration works, the way we interact with customers, the way we deal with each other and the way our internal operations work all has to change. We aren’t going to do this overnight we do have to make a start and I am convinced that chartered status, which insists upon businesses and individuals reaching certain standards, is the way forward.

Chartered status works on two levels: first, the public understand it as a concept and a ‘kite mark’, so we are using a benchmark that they understand

and can relate to. Second, it establishes a starting point for businesses and people wishing to operate in insurance. It’s not about creating an exclusive club but pushing people to attain higher standards.

q. With whom would you least like to be stuck in a lift with and why?My little girl Rhiannon, aged six. Usually I can find an excuse to escape her constant chattering and moaning but to be trapped in a lift with her doesn’t bear thinking about!

q. Which mistake have you learned most from in business (either your own or those of others)?There have been many mistakes, both my own and others. But I think for some people the worst moves they make are bad career decisions. Get the wrong move and it can take you years to get out of it or recover from any damage to your reputation. I have seen it from afar plenty of times and certainly made one myself.

I once made the decision to move in to consultancy which was a big mistake, as I sorely missed the leadership and accountability of a profit and loss role. But you learn from your mistakes and I have certainly learned that consultancy just doesn’t satisfy me as much as running a business does.

q. If you hadn’t followed a career in insurance, what would you have liked to have done?It would have been far removed from insurance. I would like to think I would have become a professional musician as I played piano, clarinet and sang when I was younger. I always wanted to do this for a living!

If you would like to be featured in a future edition, please contact Michelle Hurst Di Pasquale: [email protected]


Change leads to consequences. The aim of change is to bring about expected consequences. However, with expected consequences comes the possibility of unexpected consequences.

So it was with the last major set of legal reforms. Indeed, there were significant unexpected

consequences with the Woolf reforms, some of which became the catalyst for the Jackson reforms. The question now facing not just the legal profession, and those who are regular users of the judicial system, but society as a whole, is the difficult question alongside the expected consequences: what will the unexpected consequences of the civil justice reforms be?

The last significant round of litigation changes started with the introduction of the Courts and Legal Services Act 1990, which introduced a new regime for funding litigation and in particular personal injury litigation. Its purpose was to address what had come to be acknowledged as the defects of the 1949 legal aid regime. More radical change came with the Woolf reforms, introduced through the Access to Justice Act 1999. Three laudable aims were set out. The first was to contain the soaring legal aid bill, with public funds being directed to causes with the greatest need. The second was to look beyond legal aid and provide to a wider part of the public

access to justice to pursue what were considered to be meritorious claims. The third aim was to control the rise of weak claims.

Those three aims were met first by a significant reduction of legal aid. The other two aims were met by the introduction of conditional fee arrangements (CFAs) with a possibility of obtaining after the event insurance (ATE). The combination of CFAs and ATE insurance had the intended consequence of providing access to justice to all appropriate claims, but at the same time protecting a claimant from the very significant potential exposure that exists under the costs shifting rule. These arrangements enabled claimants to protect themselves against liability for paying the costs of both those who were acting for them and/or the other side’s costs in the event of being unsuccessful.

Some dozen years on, those laudable intended consequences can now be seen to bring with them very significant unintended consequences. The two most significant unintended consequences have led to a considerable change of perceptions: first by the introduction of funding and second as

consequences: expected and unexpected

by Nik Rochez

>>>


a result of the behaviour of some of the providers of ATE insurance.

The introduction of third party funders, particularly those who require the benefits of ATE insurance to be in place, has significantly altered the checks and balances that had previously been imposed in litigation. A claimant with the benefit of the above no longer faced any downside risk and, in short, had no skin in the game. The funder of low value claims relied upon a combination of the assessment of the claimant’s solicitor as to the merits of the claim, together with the availability to play the numbers game. In short, back sufficient cases where the prospects had been assessed as being reasonable and they were all but guaranteed a healthy return on the cohort of cases they had backed. Much the same applied to the ATE market - despite the increasing preponderance of deferring and, in effect, wrapping the premium into the cover.

Claimant’s solicitors handling such volume litigation were immediately provided with volumes of further cases that, under the previous arrangements, could never have been pursued. Others saw their opportunities in this new world and assisted the new market by seeking out and sourcing the potential claims. Such ‘claims farmers’ had no interest in the merits of the litigation and their focus was, in effect, on the need to increase the volume of matters taken on, and so increase their own return.

Unintended consequences1. The net result of all this, and the first unintended consequence of the Woolf reforms, was in effect to so shift the balance of responsibility within the

litigation framework to create potential conflicts of interest. No longer had the claimant the downside risk that reduced the potential level of responsibility that the solicitor owed to an individual client. At the same time, the solicitor’s interests were further influenced by the desire to first obtain more of these new instructions, and to pursue as many claims as possible under CFA arrangements which provided significant, usually 100%, mark up on their fees if successful. In theory, the solicitor would have some responsibility to the ATE provider to only pursue cases considered

viable. That was an almost impossible position for solicitors, torn between building a business, discharging their duties appropriately and knowing full well that litigation can never be a matter of certainty with their perception of chance no doubt being significantly influenced by this new order.

2. The second unintended consequence was that the above shifting of perception, and perhaps even responsibility, has led to conflict between solicitor, third party funder and ATE provider. In complex matters with significant funding, the third party funder can and will afford to take a significant interest in the litigation itself. In volume personal injury matters, the third party funder is forced to rely upon the assessment of the solicitor. As explained above, the solicitor in his new world has a vested interest in building a book of business and undoubtedly in a significant number of cases that would influence the solicitor’s assessment of the merits. In short, a solicitor has a vested

interest in viewing the potential of any, and indeed all, such litigation through a different lens. Without a doubt, that has led to less meritorious claims being pursued, an increase in failed cases and the resulting conflict with the third party funder.

Similar considerations arise with the ATE provider who in volume matters is also forced to rely upon the solicitors’ assessment. However, in the case of failed cases with an ATE provider, more serious issues have arisen with ATE providers refusing to pay not just

individual claims, but whole books of business.

The net result of these unintended consequences has been a significant

increase over the past several years of circumstances and subsequently claims being presented to solicitors’ professional indemnity insurers. Aggrieved funders have pressed solicitors for repayment, aggrieved ATE insurers have refused to pay out and solicitors and their notional client have turned to the professional indemnity insurer.

3. The unintended consequence of all that is that litigation firms, particularly claimant litigation firms, which were previously viewed as relatively safe prospects for PI insurers, are now finding it increasingly difficult to obtain cover. If that difficulty persists, then the likelihood is that there will be fewer such firms in the future with a real possibility that one of the central aims of the Woolf reforms - ‘access to justice’ to those of moderate means - will be undermined.

A rise, perhaps a significant rise, in calls upon professional indemnity insurers

continued >>>


Significant reformsFor obvious reasons it is difficult to predict the unintended consequences from the civil justice reforms. These reforms are the most significant and most far ranging that the civil justice system has ever introduced. Fundamental changes are being introduced to the funding of litigation, the level of general damages recoverable and, finally, the ability to recover costs if successful. We are only in the foothills of these changes, but already their impact is being felt in the conduct of litigation.

Struck outThe management of cases by the court has intensified, with judges applying rules with a strictness that has hitherto only singled out what was considered to be the unreasonable judge. Several cases have already been struck out as a result of a failure, often the claimant’s solicitors’ failure, to meet deadlines imposed in the case management process. The view is that these decisions are unlikely to be overturned by any appeal process. The result being that meritorious claims have been lost through the failure of solicitors to meet the new zeal with which case management is to be applied. An intended consequence of this new approach is the laudable aim that litigation proceeds smoothly and swiftly to a conclusion with increased judicial intervention through the case management system.

Satellite litigationThe now obvious unintended consequence is the likely increase in satellite litigation where the struck out claimant, instructing a new firm of solicitors, seeks to bring a claim against his previous solicitors for their failure. The further result of that is likely to be, at

least in the short term, a rise, perhaps a significant rise, in calls upon professional indemnity insurers and the possibility of even fewer firms being willing and able to take on litigation.

One of the main drivers in the latest round of reforms relates to both saving costs and reducing the lifecycle of claims. It is clearly intended that the introduction of fixed costs in the portal, and on the fast track for most personal injury work, will drive down costs and due to ending, in most cases, the usual battle over costs, it is thought that coupled with the efficiencies in time, the portal will bring claims would be settled quicker.

Fixed costsAn unintended result of fixed costs, and indeed of having budgets in larger cases, may be that actually defendants feel more empowered to fight claims that previously they may have simply settled for commercial reasons regardless of the merits. This was largely due to a fear of receiving a large costs bill. With cost estimates often not accurate, with hidden extras such as ATE premiums and success fees, often the true level of a bill of costs was difficult to judge and made reserving difficult, nigh impossible at times. With reserves now capable of being generally accurate to within only a few hundred pounds, it is thought that the focus returns to the merits of the case and that more cases may be taken to trial, due to the reduced risk. This may actually lead to an increase in litigation rates and actually cause claims

to take longer than hoped to resolve and minimise the expected level of savings.

One of the hopes that the banning of referral fees and the drive to see claims conducted more efficiently with quality throughout the process, was that claims

farmers would be less involved in the claims industry. Looking ahead, it is not an unreasonable prediction that in 2014 the personal injury limit for the small claims

track will increase, perhaps up to £5000. With no costs attributable to a significant percentage of all litigation there is a danger that, firstly, we will see inflation in terms of the valuation of damages and claims management companies seeking to fill the funding vacuum via the use of damage based agreements (DBA). Indeed, on many cases, the use of a DBA in an increased small claims track would see claimants representatives earn more money than if the claim were brought through the portal.

Nik RochezPartner, Hill Dickinson LLP+44 (0)207 280 [email protected]

This may actually lead to an increase in litigation rates and actually cause claims to take longer than hoped to resolve and minimise the expected level of savings.


The UK has the unenviable title of the ‘whiplash capital of Europe’. With four out of five low value bodily injury claims being for whiplash, what action can we

take to tackle this epidemic?

With whiplash claims costing the industry well over £2 billion a year, and insurers

receiving a whiplash claim, on average, every minute of every day, there is little surprise that the UK has the unfortunate title of ‘whiplash capital of Europe’. The UK is in the middle of a whiplash epidemic, with RTA personal injury claims increasing by 60% in the past five years, while the number of reported RTAs fell by 20% in a similar period. Aggressive marketing by claims management companies (CMCs) and referral fees paid by claimant solicitors (the latter was banned from 1 April 2013), have led to an increasing number of personal injury claims in general, and whiplash claims specifically.

The graph opposite (page 11) demonstrates that approximately four out five low value bodily injury claims insurers receive are for whiplash. This compares with an EU average of 48%.

Given the significant impact whiplash claims are having on the cost of both personal and commercial motor insurance, there is now consensus that action is required to tackle the

UK’s ‘whiplash epidemic’. This is why the Prime Minister held an insurance summit at Downing Street last year to look at the issue of the cost of motor insurance. Following the summit, the Government made a public commitment to work with the industry to tackle the ‘whiplash epidemic’ and in return the industry made a commitment to pass on savings from legal changes to customers. This commitment resulted in the Ministry of Justice consulting on increasing the small claims track (SCT) limit from £1000 to £5000 and reforming the medico-legal reporting system.

The insurance industry fully supports increasing the SCT. It has not been raised since 1991, when it was set at £1000. Since then, in addition to general claims inflation, there has been a substantial rise in low-value, straight forward whiplash claims. Now, even the most minor whiplash injuries have fallen out of the SCT and are dealt with in the fast track. With the average whiplash claim costing around £2000, less than 9% of personal injury claims came in under the current SCT limit in 2012.

whiplash – the industry’s pain in the neck

by Rob Cummings


The SCT is a user-friendly, simple route for settling straight forward low-value claims. Claimant lawyers have argued that increasing the SCT will impede access to justice. This is little more than the voice of self-interest. Increasing the SCT limit would not restrict access to justice. The small claims court is familiar with situations where there is potential for ‘inequality of arms’, and can guide and assist the claimant during the claims process.

The insurance industry can assist self-represented claimants in understanding their rights under any new system. There are already a number of guides available from the Civil Justice Council, Bar Council, and the ABI’s third party assistance guide. The ABI guide explains how the defendant’s insurer or appointed claims handler can assist a self-represented claimant.

Claimant lawyers are concerned that claimants will not have the expertise to value their claim and that insurers will under settle claims but this is not backed by the available evidence. Research commissioned by the ABI has found little difference between the average compensation received by claimants with or without representation. Claims with legal representation also took substantially longer to settle. The FSA carried out a review in 2010 and found no evidence of under settlement. Any potential concerns about the under settlement

of a claim would be addressed if Lord Justice Jackson’s recommendations on predictable damages were to be implemented alongside an increase in the SCT. There is also software available that allows damages to be accurately assessed. A transparent

and independently controlled and regulated system of predictable damages should address the problem of self-represented claimants having to assess their own claim for general damages.

An increase in the SCT should go hand in hand with improvements to the medico legal reporting system. The current system does not allow for sufficient independence or transparency in the way in which medical reports are obtained, which

leads to concerns over the reports that are produced. The proposals to introduce greater independence and transparency into the system are welcomed by the industry and should help to address some of these concerns.

Increasing the SCT limit and reforming the medico-legal reporting system will help the industry to combat the rising tide of frivolous whiplash claims, producing costs savings which will be passed onto consumers and businesses in the form of lower premiums.

Rob Cummings is motor insurance policy adviser at the ABI


the art of cyberwar


The cyber arms race is hotting up. The headline-grabbing distributed denial of service

(DDoS) attack against Spamhaus, a spam-fighting charity, earlier this year, was described as ‘the biggest cyber attack in history’. The volume and scale of recent attacks provide a stark reminder that computer systems and electronic data stored on those systems remain vulnerable to disruption, unauthorised access and misuse. Hill Dickinson partner Jamie Monck-Mason considers the increasing threat DDoS attacks pose to businesses that are increasingly reliant on their IT infrastructure, and how insurance products are evolving to protect businesses from these emerging risks.

What is a DDoS attack?

DDoS attacks consist of floods of nuisance traffic, which slows or crashes the intended victim’s website, leaving it offline and thereby rendering it unable to complete routine tasks

such as sending emails, processing orders or completing bank transactions. DDoS attacks are by no means a new phenomenon. According to Prolexic, the world’s leading DDoS mitigation provider, cyber criminals now launch more than 7000 DDoS attacks each day around the world. They also report that DDoS attacks have increased by over 20% in the last year. What is most concerning, however, is the increase in the scale of those attacks.

In the latter part of 2012, the average bandwidth attack was 5.9gbps - as of 2013, the average bandwidth attack totalled 48.25gbps, a 718% increase. This trend indicates that cyber criminals are increasingly looking to utilise DDoS attacks to cause maximum destruction.

Comment: EJ Hilbert, EMEA cyber head of the investigations firm, Kroll, says: ‘We have seen a dramatic and significant rise in the number of DDoS attacks by cyber-criminals worldwide, knocking companies offline, severing client communication and halting commercial transactions. DDoS attacks are used to harm companies and cost millions in damage and lost revenue.’

by Jamie Monck-Mason

Cyber criminals launch more than 7000 attacks each day. We take a look at how insurance products are evolving to protect businesses.

>>>

the art of cyberwar


What are the implications of a DDoS attack?

The most obvious threat arising from a DDoS attack is website downtime - resulting in lost profit. The potential financial loss stemming from being offline can include:

•brand reputation and customer perception – an organisation’s reputation for stability and technical expertise can suffer from a DDoS attack, causing potential brand damage while granting a competitive advantage to rivals. DDoS attacks reported in the press are likely to compromise customer confidence;

• email and call centres – when network infrastructure is targeted, DDoS attacks can bring down email and customer service call centres resulting in a customer communication blackout;

• stock price and investor confidence – organisations hit by DDoS attacks may see stock prices temporarily fall and/or experience volatile fluctuations due to investor concerns; and

• search engine rankings – an outage of any length of time may jeopardise a website’s search engine ranking. Search engine providers do not want to direct users to sites that are down or performing slowly.

The scope of DDoS attacks is also evolving. Cyber extortion, for example, is thriving - the criminal demands

payment of a ransom otherwise they will continue to knock computer systems offline. Legitimate businesses may even turn to cyber criminals to assist with industrial espionage against rivals in order to take down their sites (a favourite tactic with the online gaming industry). Rivals can also take down a competitor’s website during critical periods, for example in the case of retailers, during the sales.

Protecting against a DDoS attack

Firewalls and Intrusion and Detection Protection Systems (IDPS)

While firewalls and IDPSs are essential in the fight against unauthorised access to computer systems, neither device is designed to deal with modern-day DDoS attacks. IDPSs, for example, may be able to detect attacks to the computer network, but the attacks can still easily overwhelm servers and cause them to crash.

DDoS mitigation software

This is a good step provided there are trained experts on site who can configure the software in response to shifting attack methods. The difficulty is that cyber attacks are constantly evolving. As soon as defences harden, so the cyber-criminals rise to the challenge and overcome them.

The cloud

For many organisations, the cloud may seem like the perfect answer to protecting its own computer systems. Cloud-based defences are capable

Comment: Tom Allen, head of technology liability at Aspen Insurance UK Limited, says: ‘Such policies are designed to fill the gaps in cover left by traditional policies. There does, however, remain a great deal of confusion amongst businesses as to what risks such a policy is actually intended to cover. It is accepted that computer systems are vulnerable to attacks of one form or another, which can result in significant financial loss. The challenge for the insurance industry is to offer policies that are both clear in terms of the cover they provide, and address the risks actually faced by businesses operating in a world increasingly reliant on technology for day to day activities, as those risks continue to evolve.’

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of defusing DDoS attacks before they even reach an organisation’s own network. However, the terms of business with cloud service providers (CSPs) should be reviewed carefully. More often than not, CSPs disclaim any liability to their customers arising out of unauthorised access to their data or following interrupted access to data (e.g. following a DDoS attack) including liability for any loss of business, profit or data.

The role of insurance

It is abundantly clear that network security alone, however sophisticated it may be, cannot entirely address the various cyber threats, including DDoS attacks. Neither are CSPs going to readily absorb their customers’ liabilities following a network security incident. Insurance, therefore, can play a critical role as part of an organisation’s risk management strategy.

It should not, however, be taken for granted that existing insurance cover will cover cyber risks. Cyber policies have been specifically developed to cover third party liabilities arising from denial of third party access to the insured’s computer networks together with various other security threats to networks. Cyber policies may also cover first party losses including those arising from the following:

•damage to the insured’s own computer hardware or data;

•PR costs following a DDoS attack;

•business interruption following, amongst other threats, a DDoS attack; and

• cyber extortion, including payments made to a cyber criminal to not carry out a threatened attack or to withdraw an attack.

Conclusion

It is critical in light of the increased threat of attack to computer systems that companies carefully evaluate cover for cyber risks under their existing suite of insurance polices in order to assess what level of cover they have for computer systems risks.

No organisation can render itself completely immune from cyber attacks. However, a robust risk management strategy aimed at minimising the potential for cyber threats, together with an insurance program that is sufficiently comprehensive to cover cyber risks in the event the worst does happen, is now increasingly essential for any business.

Jamie Monck-MasonPartner Hill Dickinson LLP+44 (0)207 280 [email protected]


by D.I. David Hindmarsh

The incident investigation crime board was established three years ago. Its goal? To respond to the threat of organised criminal gangs and their links to ‘crash for cash’.

catcher if you can

The teams of the incident investigation crime board were established about three years

ago in response to the growing threat to road users in London. This threat manifested itself in the form of organised criminal gangs (OCG), often with links to other serious forms of criminality, which induce collisions to commit insurance fraud, commonly referred to as ‘crash for cash’. The team, dubbed ‘Operation Catcher’, has seen a series of staff cuts due to restructuring of policing budgets and currently consists of a detective sergeant and six detective constables both from traffic and CID backgrounds.

Their main objective is to reduce the total of those killed and

seriously injured on the London road network and is divided into two strategies: the first is our disruption/

prosecution strategy, achieved by instigating intelligence-led, proactive and reactive operations against the organised criminal gangs operating within London. The second one is

our education strategy which is addressed by ‘Operation Catcher’ involvement with the media and

delivering presentations on ‘crash for cash’.

The team work closely with many stakeholders, including Hill Dickinson, in order to identify those persons committing this type of fraud. Since the team’s inception, tactics have constantly developed, with the initial focus being upon the gang members who are inducing the collisions, to recent operations focusing upon the corrupt enablers, such as claims management companies/engineers/ solicitors and medical professionals.

Fraudulent insurance claims uncovered by insurers have topped £1.1 billion a year as

the industry clamps down on insurance cheats Source: ABI


OPERATION VARNA The team worked with a leading insurer who brought to their attention an induced collision which had occurred just outside of London - but featured the third party as residing within London. The customers on this operation were three leading insurers. The investigation identified an AMC based in South Yorkshire and this was prevented from trading as a result of the team executing a search warrant. The insurers worked with the team and identified a number of collisions throughout London and the Home Counties which were fraudulent. The result of the investigation was the permanent closure of the AMC, and four convictions, a saving to the insurance industry of around £100,000.

OPERATION FRAGOR This investigation centred on the corrupt activities of a North London Accident management company. It was identified that the main affected were three leading insurers and a major supermarket chain. The team worked closely with the IFB and the insurers, gaining valuable intelligence while being supplied by one of the insurers in the form of a laptop on loan in order to set up covert monitoring points. The investigation resulted in a number of search warrants being executed, including one on the accident management company. Also present on the raids were representatives from the IFB and MOJ. The final result was the closure of an accident management company, three custodial convictions, and a saving to the industry of approximately £12.4 million.

Upon receiving a referral of fraud, ‘Operation Catcher’ seeks to develop the information identifying the key subjects who will become the focus of attention...

The subjects will have full intelligence dockets raised utilising police and external databases. The tactics open to the police are vast and varied. By way of some examples the team have employed the services of the police helicopter surveillance teams and also more covert methods, which can be quite intrusive and resource intensive. A typical operation from inception to charge will take around 12-18 months, so no quick results, but the benefits outweigh this extended time as the majority of suspects plead guilty, negating the need for any lengthy or expensive trials. In the time that the team has been formed, only three contested trials have occurred. However, all have eventually resulted in convictions and the team have executed over 50 operations with over 300 arrests - this is estimated at around £25 million in fraud savings.


Risk identification is one of the keys to successful risk management, but we are not equally aware of all risks. Because the brain filters information, people make decisions based on a subset of the available evidence. This fundamental principle of cognition can cause problems in a context, such as underwriting, where subjective judgements are important.

cognition: minding risks

a Lloyd’s report

In their recent report, ‘Cognition-minding risks’, Lloyd’s discuss how human factors can affect risk

perception. It draws on psychology and related disciplines to highlight potential biases in risk perception.

The report is a follow-up to Lloyd’s: ‘Behaviour: Bear, Bull or Lemming’, which provides an overview of behavioural theory and discusses the benefits to insurance professionals of being aware of behavioural biases.

Expectations can hinder or facilitate the identification of risks

Expectations can lead people to overlook events that are not part of the normal routine. Accurate expectations rely on prompt and accurate feedback: if feedback is inaccurate, delayed or diffused, faulty mental models can develop. People’s expectations are strongly influenced by personal experience and current events: frequent exposure to risks may also make it easier to lose sight of infrequent losses. Unexpected losses can arise from interrelated risks,

by Mario Weick, Tim Hopthrow, Dominic Abrams and Peter Taylor-Gooby


from the way the public responds to a disaster or hazard, and from events that are not captured in risk models.

Risk perception is context dependent

People cannot attend to all risks - they have to prioritise some over others. Risk priorities are culturally transmitted. Re/insurers may focus more on risks that are easier to evaluate, which can draw attention away from those that are more difficult to assess. This is because people prefer to focus on well-structured problems and veer away from more difficult ones. People are also inclined to take greater risks in environments that encourage ambition. The spatial concentration of expertise in the London market has many benefits, but it also provides a context that can lead to biases arising from social interactions. Risks may be overlooked when many people rely on the perceptions and actions of a few ‘experts’ and/or align themselves with commonly held beliefs.

Power affects risk perception

Organisations are characterised by hierarchies, often beyond the formal roles assigned to individuals. People in power tend to be more confident and this can lead them to minimise risks. Power can also reduce willingness to adopt different viewpoints and enhance the tendency to seek information that reinforces already held views, which may cause problems in an underwriting context. Incentives which encourage a low risk appetite can counteract these behaviours and make power holders more averse to risks.

Risk perceptions vary over different timescales

People often under-emphasise the history of previous similar events, which can increase forecasting error. Short-term incentives can reduce foresight and risks which are likely to happen in the long-term future can be more easily overlooked. People tend to be more optimistic about future events or activities, but as these

events draw nearer their attention turns to potential drawbacks or losses. Sometimes events or activities that were once desirable are no longer appealing when viewed from a closer perspective. Finally, losses associated with concrete events are often more compelling than those associated with more abstract events.

Organisational practices can increase risk awareness

Analyses of organisations have highlighted factors which can increase risk awareness and improve risk management outcomes. These include fostering mindfulness and analytic thinking among staff, embracing diversity, giving people a ‘licence to think’ and the ability to make decisions. Organisational practices should also encourage people to use alternative ways of analysing problems.

>>>


Risk experts need to be aware of how uncertainty affects their decision making

Signs of potential hazards are not always clear-cut and can be hard to interpret. A low risk appetite can increase false alarms and a high risk appetite increases misses. Neither attitude helps to identify threats when the evidence is uncertain, and re/insurers need to keep up with the pace of developments. With uncertainty people tend to rationalise their decisions, reducing their awareness of their own bias.

Human factors are an important part of managing risks

Re/insurers can benefit from research conducted in the social sciences and humanities. There is a need for more front line research and interaction between academia and the industry. There are limitations to the identification of risks and unknowns need to be acknowledged and managed carefully.

Questions that re/insurers can ask to counteract some of the issues that arise from the way expectations affect risk perceptions

Habitual thinking Do established routines miss out on important pieces of information? Do processes lead to habits that prevent people from asking important questions? Have the parameters changed? Do routines no longer cover all angles?

Missing feedback Is there enough information to verify your assumptions? How robust are your models? What kind of information would make them more robust? Can you use auxiliary variables as substitutes for missing information? How does your company feed information back to you? How timely and relevant is the feedback?

Desensitisation Have some risks lost their bite? Have some of your colleagues become so familiar with certain risks that they have been caught out? Could you be in the same situation one day? If so, how can you prevent that from happening?

Exploration bias Are some events forgotten? Is everyone talking about the same thing, with recent or current events consuming all the attention? If you could go back or forwards a few months in time – how would that affect how much attention you devote to different risks?

Media The media is selective. Does the media influence your underwriting decisions? Media coverage can bias risk assessments. Is there relevant information that has not received media attention? How does the public respond to the media coverage? Are there any risks associated with the public’s response? What if you are underwriting a risk that suddenly receives a lot of media attention? Could this increase the number of claims and exacerbate the losses?

Amplification Some disasters can cause costly shockwaves. Do your models account for the way people may respond to a disaster or accident? People’s actions can create dependencies between seemingly unrelated risks. Is it possible, or indeed worthwhile, to account for those?

Risk dependencies Dependencies can make some risks unaffordable. Do you have guidelines covering whether or not your premiums should account for dependencies? Do you know how dependencies affect your solvency capital requirement? Is it possible that a line of business is lucrative considered alone, but not in your portfolio?

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Questions to help underwriters put risks into perspective

Inside perspective

Do people overestimate the uniqueness of current projects or events? Can you think of processes that would benefit from bearing in mind how similar activities turned out in the past?

Discounting People can expose themselves to risks because immediate gains carry greater weight than distant losses. Does that also apply to the risks you are underwriting? Are your models based on the assumption that people weigh near and distant losses equally? Do your risk management strategies emphasise short term gains?

Abstract and concrete thinking

Risks that elicit concrete mental images seem more paramount than risks that are more diffuse and abstract. Can you break down diffuse risks into smaller categories (e.g. distinct classes of events)? Ask ‘how’ questions about future events.

Acknowledging behavioural risks is also the first step towards using behavioural principles to create added value. The following recommendations highlight how re/insurers, who are accustomed to working with experts at the forefront of technology and engineering, can embrace behavioural principles:

• Encourage discussions between behavioural scientists and the industry. This report provides a starting point for communication between the industry and the scientific community. Further dialogue through organisations such as the Lighthill Risk Network7 should be encouraged.

• Support research initiatives. Scientists require the support of industry to apply their knowledge

and expertise to situations that are most relevant for organisations. There is a need for more behavioural research in work settings.

• Involve the social sciences and humanities. Risk analysis can benefit from the expertise accumulated in the social sciences and humanities. For example, an understanding of social amplification requires an understanding of social, cultural and historical settings.

• Encourage divergent thinking. Organisations often create pressure to conform. Insurers can develop platforms and environments where divergent thinking is actively encouraged. For example exposing employees to different roles or environments can promote different viewpoints and remove preconceptions.

• Acknowledge the limitations of risk identification. Re/insurers are dealing with complex issues where it is impossible to identify all unknown unknowns.

• Reward behaviour that contributes to better risk identification. Organisational reward structures may encourage short-term thinking. Loss ratios may not be a good measure to assess performance industry. Cognition: minding risks in the context of new or emerging risks, or risks that are infrequent. Reward structures provide a means of aligning the goals of employees with company objectives.

About the authorsMario Weick is the lead author. He is a lecturer in psychology at the University of Kent with a background in social and cognitive psychology. His doctoral research focused on behavioural biases and the role of power and subjective experiences in decision making.

Tim Hopthrow is a lecturer in psychology at the University of Kent. His expertise is in group decision making and risk behaviour in groups. His doctoral research focused on understanding cooperative behaviour in small groups.

Dominic Abrams is a professor of social psychology and director of the centre for the study of group processes at the University of Kent. He has published widely across the core of social psychology, branching into organisational, cross cultural, education, and health research.

Peter Taylor-Gooby OBE is a professor of social policy at the University of Kent. He is internationally noted for his work on new social risks. He is co-director of the Risk Research Centre at Beijing Normal University.

To download the full report, please visit: lloyds.com.


A Sisyphean task?

The Marine Insurance Act 1906 is an astonishing piece of Victorian intellectual capital, the

overwhelming bulk of the work being undertaken towards the end of Queen Victoria’s reign. It took 12 years to find its way into the statute book, however, and is, in that sense, strictly Edwardian. The Act has arguably made one of the most significant legislative contributions to the prosperity of the City of London (and Great Britain itself), just as other types of Victorian capital continue to sustain the British economy, much of London’s railway infrastructure being a prime example.

The Act is built on a compendium of case notes, out of which a series of core principles were abstracted, then crafted into the form of a codifying statute. The Act has pride of place among the Victorian legislation designed to bring order to English commercial law, the backbone of international and domestic trade, including the Bills of Exchange Act 1882 and the Sale of Goods Act 1893. Following the rationalisation of the courts system by the great Judicature Acts, commencing in 1873/5 with the fusion of Courts of Common Law and Equity, complemented by the foundation of the Commercial Court in 1895.

The Marine Insurance Act is durable and enduring - it has remained in place, substantially unamended, in over 100 years. It is a classic example of accuracy, brevity and clarity with just 94 sections, each beautifully expressed and has provided the framework and foundation for the success of London’s hugely successful insurance market over these 100 years, while Britain’s role in the maritime world has otherwise undergone enormous change. English marine insurance, in tandem with the English legal system which regulates, applies and enforces it, has survived and prospered while much of the edifice on which it was built has been progressively dismembered: ship building, ownership and management have declined dramatically: weeds grow in the shipyards on the Tyne and the Clyde, and Scottish voices have fallen silent in the engine room. There has been a huge migration of ownership and management of vessels east, although not necessarily in all classes of tonnage. We are living in a paradigm shift.

There have of course been calls to amend the Act in the past (see for example the Law Commission’s report of 1980, which came to nought). But are we now finally on the cusp of significant change to the Act?

In 2005, the task of reviewing insurance contract law and proposing potential amendment to the Act was allocated to the Joint Commission of the English and the Scottish Law Commissions which set out a joint scoping paper in January 2006 and thereafter has issued an enormous volume of materials. Broadly, these can be divided into materials which bear upon pre-contract duties and those which touch upon post-contract duties and other issues. As to the former, there have so far been three ‘Issues Papers’ addressing respectively misrepresentation and non-disclosure, warranties, intermediaries and pre-contract information. These papers have been followed by a consultation paper issued in July 2007 on misrepresentation, non-disclosure and breach of warranty by the insured. This latter paper has thus far generated some ‘solid product’ at least in relation to consumer insurance: the Consumer Insurance (Disclosure and Representations) Act 2012 received the Royal Assent on 8 March 2012 and came into force in April 2013.

But what of business insurance? An issues paper on micro businesses was issued in April 2009 with a consultation paper on business insurance - pre-contract disclosure, misrepresentation and warranties - following in June 2012.

the reform of insurance contract law

by Rhys Clift

image: http://www.wikipaintings.org/en/titian/sisyphus-1549


As to post-contract duties and other matters, there have been a series of papers addressing insurable interest, one arcane topic (Fires Prevention (Metropolis) Act 1774), damages for late payment (a topic of considerable interest to some), the insured’s post-contract duty of good faith, the broker’s liability for premium and finally the requirement for a hard copy marine policy (in a world where business is shifting evermore towards electronic products). A resulting consultation paper was issued in December 2011 on post-contract duties and these other issues.

It is envisaged that subsequent to this consultation paper (and the consultation paper in relation to business insurance law: pre-contract disclosure, misrepresentation and warranties) a final report will be generated and then finally a draft bill will be laid before Parliament in hopes of attaining the Royal assent at some time thereafter.

This, then, forms something of a backdrop against which one might view specific proposed amendments to the reform of insurance contract law when they finally come forward. The commission has obviously amassed a vast body of work, an invaluable repository of summary of the law and of the views on the many and various interests in the market derived through an exhaustive consultation process. Some might say there has been ‘mission creep’, but the joint commissions will, and must, persist.

One might touch lightly here on one or two items from the catalogue of amendments that might be made: for example, it might be right to curtail the rights of insurers in respect of non-disclosure and misrepresentation in business insurance (and not merely the

law that affects consumers); it might be right to finally impale the bête noir of marine insurance, the non-causative breach of warranty; it might be right to afford more extensive rights and remedies for lack of good faith in the presentation of claims (short of fraud); it might equally be right to create some new statutory right to damages or other compensation payable in addition to policy indemnity (whether there has been a refusal or a delay in paying a valid claim); superficially at least there is an obvious attraction in ending the requirement for the issuance of a hard copy policy and the substitution of a legal right to an electronic document; and why, one might ask, should London brokers continue to be responsible for the payment of premium at a time when funds can be remitted almost instantaneously from abroad at the touch of a key? And why, in the twenty-first century, should English law retain the requirement of an insurable interest to distinguish insurance contract law from gambling? And yet when one looks into the detail, difficulties emerge.

What does seem unlikely is that the whole reform juggernaut will do much to deal with some of the anomalies that can arise from the use of warranties in English insurance contracts. And one might have some sympathy for assureds who continue to regard warranties with some measure of bafflement and annoyance. The remedy for breach of warranty is obviously perceived as harsh (especially if non-causative): the mere use of the term does nothing to provide the parties with any guide to meaning or a guarantee of certainty. The whole Contract Certainty initiative might have promised, as its name would suggest, certainty of content (at least in the sense of gathering together the policy

documentation within a few days from placement, so that all the standard forms, clauses, endorsements, etc. are at least stapled together), but that was only ever going to be half of the debate and was never going to achieve certainty of meaning. To take warranties alone, one might choose to describe a particular policy provision as a warranty, but that does not mean that the courts would necessarily treat that provision as such. Conversely, clauses might be drafted which do not include the term ‘warranty’ and the court would nonetheless hold that such a clause should be a warranty with the consequences that implies.

And so, although in the very concept of ‘contract certainty’ we hear echoes of the positivism of our Victorian forebears who began this whole (now increasingly tortured) process, whatever the legislative outcome, it remains more than likely that the courts will continue to exercise what is perceived by some to be the utmost ingenuity to ensure that, irrespective of the terms used, the final result of the circumstances of the case should be perceived as broadly ‘just’. Then, despite the best efforts of the joint commission, one must finally wonder what certainty there can be in that.

To view the full version of this article, please contact Rhys Clift.

Versions are also available in French, Spanish and Italian.

by Rhys Clift

Rhys Clift Partner, Hill Dickinson LLP +44 (0)207 280 9199 [email protected]


new ‘careless driving’ fixed penalties raise more questions for insurersby Derek Millard-Smith


Following House of Lords approval new penalties to tackle careless driving have come into force.

The changes give police the power to issue fixed, on the spot, penalties of £100 and three penalty points for careless driving. In addition, current fixed penalty levels for offences such as using a mobile phone while driving, will rise to £100.

While the new powers relate to careless driving generally, the publicity surrounding them focuses on tailgating and middle lane ‘hogging’.

Here, we take a look at the likely realities of these new powers and the questions they will inevitably raise for insurers.

From the Government’s perspective, being seen to deal with middle lane ‘hoggers’ will prove popular with the voter, however, in practice, dealing with this common frustration to other road users will prove difficult, if not impossible.

The Government states their motivation is to allow police to punish careless drivers who would normally go unpunished due to the lengthy court procedure and bureaucracy which is associated with careless driving offences. The new fixed penalties, as they currently do for speeding and mobile phone use, enable drivers to accept on the spot penalty points and fines rather than having to attend court. Drivers do not have to accept a fixed penalty and can still contest the decision through the courts and, as with existing fixed penalty offences, the police also have the power to offer driver training as an alternative to an endorsement in certain circumstances.

But the new penalties raise the question for police, drivers and insurers alike: does driving in the middle lane mean the driver is ‘careless’?

Careless driving is defined as either, or both of:

1) driving that falls below the standard of a careful and competent driver; or2) driving without reasonable consideration for other persons using the road (i.e. inconveniencing others).

The powers give police officers discretion, and each individual officer is likely to have differing views on what is careless in the circumstances based upon the wide definitions above.

Middle lane use is so subjective that the enforcement for ‘hogging’ is likely to defeat the purpose of the new powers, namely to avoid and reduce court appearances. The outer two lanes of motorway are designated ‘overtaking lanes’ and therefore technically middle lane driving should only occur when overtaking slower moving traffic. The enforcement of the new powers will need to take into consideration questions such as how far in advance of the slower moving traffic is it reasonable to anticipate and change lanes, and what is ‘congestion’ requiring individuals to stay in the middle lane?

Police officers will have to differentiate between drivers not wanting to dart in and out of lanes and those who truly ‘hog’ the middle lane when the first lane is clear, so causing an inconvenience to other road users. It is unlikely that police officers will be able to categorically label someone a ‘middle lane hogger’ due to the catch 22 argument that arises with regard

to middle lane use: if there is any other traffic around, anticipatory use of the middle lane can be argued and if there is no traffic around, how can the driving have inconvenienced other road users?

So few, if any, middle lane use fixed penalties will be accepted if issued. It is envisaged that if drivers are stopped for middle lane hogging, we will most likely see a significant increase in the revenue for driver awareness course providers - rather than fixed penalties. This will quite correctly focus on tailgating which (while raising its own questions) is clearly dangerous and from an insurance perspective more likely to result in accidents, which in turn some say justifies increased premiums.

For insurers, consideration must be given to drivers accused of middle lane hogging and whether such driving means they are more likely to be involved in accidents. The majority would argue that while annoying, such drivers are very careful so it would not be justifiable to increase their premiums. Further: if they have attended a driver awareness course as a result, they are likely to be even less of a liability than before.

Perhaps the outcome of these new powers will see additional emphasis by insurers on differentiating between different fixed penalty codes on an insured’s licence? We shall see.

Derek Millard-Smith Legal Director, Hill Dickinson LLP +(0)151 600 8843 derek.millard-smith@ hilldickinson.com


The date is fast approaching when the number of deaths from mesothelioma is expected to peak

and then gradually decline and indeed there does appear to be a tailing off of claims by men alleging heavy exposure to asbestos. Paradoxically we appear to be seeing an increasing number of claims from those whose level of exposure was undeniably very low. Cleaners, doctors, nurses, teachers, students, shop and office workers or close family of those who worked directly with asbestos are the latest victims of this deadly condition. Yet the law on liability in such cases appears confusing and urgently in need of clarification.

After the Supreme Court judgments in Sienkiewicz and Willmore, defendants would have been forgiven for assuming that the possibility of ever again being able to defend any mesothelioma claims, using the de minimis argument, had dwindled to nought.

In Sienkiewicz, the deceased had been employed as an office worker in a factory between 1966 and 1984. She usually worked in an adjacent office block, but her duties took her into all areas of the factory. It was calculated by the trial judge that her exposure to asbestos would have been only 18% above the general environmental exposure level. The case is principally known for the defendant’s unsuccessful arguments on causation, however, the Supreme Court briefly also considered what would amount to de minimis exposure.

Lord Phillips stated that, given the current state of knowledge of mesothelioma, the only circumstances in which the court would be able to conclude that wrongful exposure to asbestos did not materially increase the victim’s risk of contracting disease, would be where the exposure is insignificant compared to that from other sources. By way of illustration, he referred to earlier case law where it was conceded on the defendant’s behalf that even exposure to asbestos dust for a period of one week would not be de minimus.

coming up for airIs there a consistent and developed approach to mesothelioma claims? The spotlight falls on some crucial cases.

by Alison Moss


In Willmore, the deceased’s culpable exposure, while a school child in the 1970s, arose from damaged asbestos ceiling tiles in a toilet, work carried out to the ceiling in a corridor where tiles which were broken or chipped were stacked for a few days and from the storage of damaged tiles in toilets for a period of about two weeks.

The detrimental effect of these rulings on the ability of defendants to resist such claims was not lost on the judges making them. Indeed, one of the judges indicated that mesothelioma cases must now be considered from the defendant’s stand point ‘a lost cause’, while another pointed out that ‘a defendant who may very well not have caused the claimant’s disease – indeed probably did not do so – is fully responsible for its consequences’.

It might have been thought that the key to the claimants’ success in these cases lay in the fact that the exposure occurred post-1965 and the publication of the Newhouse and Thompson reports, and that pre-1965 exposure would not bring any liability. This was demonstrated to be a forlorn hope by the judgment

of Anderson –v- RWE Npower Plc in March 2010. Here, an office worker was exposed to environmental asbestos dust on his journeys around a power station between August/September 1948 and November 1949. The victim’s exposure was effectively to background levels of asbestos dust rather than dust arising directly as a consequence of operations which he undertook such as lagging.

It would have been impossible for this claimant to prove that the operations presented a foreseeable risk of injury given the state of knowledge about the dangers of asbestos dust at that time. The claimant therefore chose to base the case on breach of statutory duty rather than negligence. Even though the deceased himself had not been exposed to any more than environmental levels of asbestos, the court found that there were high levels of dust of all kinds within the power station. The defendants had been in breach of section 47 of the Factories Act 1937 and the court accepted that this breach afforded the claimant a means of proving liability. By the spring of 2010 therefore, it appeared that it was ‘game over’ for defendants in low level exposure cases. If a claimant

could not succeed in negligence, there was always the possibility of a successful claim based upon breach of statutory duty. However, since then, there has been a string of judgments which have muddied the water for claimants and provided defendants once again with some chance of defending these claims.

The uncertainty of the position for claimants in low level asbestos exposure cases actually began in July 2009, only a few months after the Supreme Court judgments in Sienkiewicz and Willmore. Mrs Justice Swift in Abraham –v- G Ireson & Son (Properties) Ltd and another reminded everyone that pre-1965, the question of foreseeability was still up for grabs.

The claimant’s exposure in this case arose from infrequent use of an asbestos scorch pad for a few minutes, to protect surfaces vulnerable to heat damage whilst soldering pipe joints. Dust arose from the gradual disintegration of the pad. A further source arose from the use of asbestos string for caulking the joints of soil pipes. In both events, the claimant would get a ‘bit’ of dust on his hands and fingers. The judge found that his

coming up for air

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exposure would have been very light and intermittent in one respect and modest and infrequent in another.

Having considered the development of knowledge of the dangers of asbestos, she found that it was highly unlikely that the defendants in this case would have foreseen the risk of injury. This absence of foreseeability also prevented the judge from finding in the alternative that there had been a breach of statutory duty.

The Court of Appeal judgment in Asmussen -v- Filtrona United Kingdom Ltd followed which, while possibly watering down the effect of Anderson, drove a coach and horses through Sienkiewicz. Here, the deceased alleged exposure at a cigarette factory between 1955 and 1960 and 1962 to 1972. Her exposure arose from a recollection of passing on one occasion within 20 feet of pipe work which was being lagged with ‘a thick hessian cloth’. She believed that this occurred during her first period of employment rather than her second, although evidence was adduced from other witnesses on behalf of the claimant that it may also have been during her second period.

The judge found that she would have been exposed to asbestos from that event at a level which was below the advised enforcement levels, as specified in the Technical Data Note 13 ‘Standards for Asbestos Dust Concentration for Use with the Asbestos Regulations 1969’ issued by the factory inspectorate in 1970. While that level of exposure was more likely the cause of her condition

than any other source, the judge found that the exposure was very much more likely to have taken place in the first period of employment rather than the second. He therefore concluded that the risk of injury was not foreseeable by the defendants.

Once again, this absence of foresight on the part of the employer as a consequence of the state of knowledge and guidance offered at the time led the judge to follow Mrs Justice Swift in Abraham and not to find that the allegations of breach of statutory duty on the defendant’s part would avail the claimant of victory.

Claimants’ solicitors might truly have thought that the tide had fully turned against them in the Court of Appeal judgment in Williams -v- University of Birmingham. The unfortunate claimant here failed to demonstrate negligence in respect of exposure to asbestos of .1f/ml from lagged heating pipes in a service tunnel where the deceased spent up to 78 hours undertaking speed of light experiments over eight weeks in 1974. Once again, the issue of foreseeability was judged by reference to the nearest published technical data in 1970.

This Williams’ judgment is difficult to reconcile with that of Willmore in providing guidance to either claimants or defendants as to their prospects of success in this type of case.

The most recent case in this area is that of Hill -v- John Barnsley & Sons Ltd, a first instance decision which provides no greater comfort of certainty to either

defendants or claimants. It concerned exposure in a power station for three months in tax years 1968/1969 to 1969/1970. The exposure alleged was as a consequence of dust containing some asbestos which showered on to the deceased in the course of testing the strength of girders. The judge found exposure occurred on many occasions every day over a six week period, and each time would have been up to 100f/ml for the first few seconds.

In deciding the claim, he considered the Williams case, with its emphasis on the right of employers to rely upon published data in arguing foreseeability and concluded that it was correctly decided by the Court of Appeal. Conversely, however, he was also prepared to accept the Court of Appeal’s view in McGuire -v- Harland and Wolff, the pre-1965 secondary exposure case, which indicated that an employer would be in breach of duty if it failed to reduce an employee’s exposure to the greatest extent practicable.

Currently there seems to be no consistent and developed approach to these claims and neither defendants nor claimants can predict with any certainty what the outcome will be. Clarity is in everyone’s interests given the emotional distress to claimants and the costs involved in pursuing litigation with an unpredictable outcome.

Alison Moss Partner+44 (0)114 229 7901 [email protected]

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is it all doom and gloom?by Ruth Lawrence

For long-tail classes of insurance such as PI, premium receipts are often insufficient, of themselves, to pay claims. Investment income is crucial, but investment returns are poor. Reserve releases are no longer coming to the rescue of underwriters and premium levels remain low. According to research by the Insurance Times, the top 20 UK commercial lines insurers have, considered as a whole, failed to achieve underwriting profit in each of the past three years. How long will it last?

In the run-up to what is likely to be many firms’ last October renewal, Ruth Lawrence discusses the current solicitors’ PI market and asks: what will happen in the future?

2012 renewalsLast year, only firms with poor claims records had difficulties obtaining cover. While smaller firms saw falling rates and new capacity, the rates for larger firms remained stable. This market was a result of an influx of capacity and the aggressive approach to winning business taken by new entrants. In 2012, unrated insurers accounted for 12.3% of the solicitors’ PI market. The fall in overall solicitors’ PI premiums in 2012 from £255.7 million to £239.3 million was largely due to extra capacity and firms struggling in tough times (leading to lower fees on which their premiums are based), rather than any improvement in overall claims experience.

Changes this year2013 will see the end of the common renewal date, which historically led to a clamour for cover in the run up to 1 October.

More significantly, the Assigned Risks Pool (ARP) will be abolished from 1 October 2013.

In the early years of the ARP, the cost of the fund to qualifying insurers was less than 1.5% of total premiums. Between 2008 and 2010, the estimated cost to insurers increased to 20%. The level of contribution was unsustainable and a Solicitors Regulation Authority (SRA) consultation in 2010 concluded the ARP should be abandoned.

While insurers currently provide six years’ run-off cover where insured firms cease trading during a policy period, historically most firms entered the ARP if they could not find appropriate cover before 1 October (either by application or by default). Once in the ARP, if the firm ceased trading then run-off cover was provided by the ARP and funded on a pro rata basis by qualifying insurers.

From 1 October 2013, those firms which have not obtained cover for the 2013–2014 indemnity year will automatically be granted a 30 day Extended Indemnity Period (EIP) by their existing insurer so that the firm can continue to practise whilst seeking cover. If the firm still has no cover by the end of the EIP, it will then have a 60 day cessation period (CP) in which to cease practising,

during which period it cannot accept any new instructions or carry out any unpermitted activities. After that, the existing insurer is obliged to provide six years’ run-off cover (backdated to 1 October 2013 – i.e. not six years from the expiry of the EIP and CP).

What does the future hold?Premium income, market share and competition.Claims numbers are, apparently, improving1. While 210 claims were issued against solicitors in the Chancery Division in 2009, in 2010 that number had reduced to 144 and, by 2011 to 125. Of course, the long-tail nature of this class of business means that payments for claims issued in 2009 are only hitting insurers’ accounts now.

While the big players are likely to carry rates this year, there is unlikely to be any significant hike in overall premium levels. Those insurers that left the market, exasperated with having effectively insured uninsurable firms through the ARP, may seek to dip their toes back into the water but if they do, their underwriting is likely to be cautious. Unrated insurers seem likely to maintain a significant market share.

Competition amongst rated insurers, particularly for sole practitioners and two to three partner firms has, in recent years, been thin. Rated insurers tend to limit their exposure at the smaller end of the market to Solus agreements with broker partners. While rated insurers’ appetites may improve this year, their market share >>>

1It is important to remember that thousands of lenders’ claims have been settled without litigation and many have entered standstill agreements whilst negotiations take place.


is unlikely to increase if they continue to be undercut by their unrated counterparts.

The Law Society’s current list of insurers, which have indicated an intention to apply to become Participating Insurers2 for 2013, includes nine rated insurers which intend to cover sole practitioners and eight which say they will write two to three partner firms. While moving the single renewal date will enable these insurers to look more carefully at the risk profiles of smaller firms, the fact remains that they are likely to be undercut by unrated insurers with less experience of the market and a desire to gain market share. It is a sign of the times that many firms continue to be driven by price.

As 1 October approaches, more announcements are being made by insurers about how they intend to write cover this year. In what seemed to be a blow for some would-be insureds, XL has announced that it plans to reduce its share of the market. XL was the biggest insurer by market share in 2012, writing a total of £38.4 million premiums, but is planning to do less business this year due to market conditions not allowing for adequate pricing in some areas. However, in response, QBE has extended its offering to cover one to three partner firms on a case by case basis. AIG meanwhile is rumoured to be pulling out of the market for conveyancing firms.

Unrated insurersToo frequently in recent years unrated insurers (notably Quinn and Lemma) have become insolvent when premiums failed to cover their losses.

In the event of insolvency, firms must generally obtain alternative insurance (or, until 30 September 2013, enter the ARP) within four weeks3. This tight timescale will concern the 1300 firms currently insured by Balva, following the decision of the Financial and Capital Market Commission on 17 June 2013 to withdraw Balva’s operating licences and commence winding-up proceedings by appointing a liquidator. The SRA has not yet decided whether this step constitutes an insolvency event, but has recommended that Balva insureds seek quotes now for alternative cover. It is noteworthy that Balva insureds were told they could cancel their policies from 1 June 2013, with the premium from then until 30 September 2013 returned if it was used to purchase replacement cover with German insurer Berliner Versicherung Aktiengesellschaft, another new and unrated carrier. Rumour has it that Berliner has already signed up 900 of Balva’s insureds for 2013. Unless Berliner seeks increased premiums from Balva insureds, they may struggle to make the current book profitable.

The plight of unrated insurers raises questions about whether there should be stronger controls over participating insurers. Indeed, the SRA has recently acknowledged that it is time to look again at whether financial eligibility criteria should be introduced. Of course, excluding unrated insurers altogether would leave many firms with few, if any, options and with the ARP no longer available as the insurer of last resort, they would have little option but to close. However, the SRA has confirmed it will, during the course of the 2013–2014 indemnity year, consider whether to allow only

rated insurers to become Participating Insurers from 1 October 2014.

The Law Society itself is also looking to enter the fray for one to four partner firms through a proposed MGA run by a broker, Miller, and underwritten only by rated insurers. Some insurers were unenthusiastic about underwriting the MGA, given conflicts with existing Solus agreements and the likelihood they would, effectively, be competing against themselves for business. It seems, however, that the MGA does now have capacity with the backing of at least one insurer without a significant historical presence at the smaller end of the market.

Large firmsInsurers including Aviva, which held 3% market share last year, are pulling out of the SME solicitors PI market and focusing on larger corporates (in Aviva’s case those with fees of over £10 million a year) for which they can develop global insurance programmes. It is easy to see how underwriters might become more competitive if they can sell other, less risky, products to insureds, as well as PI cover.

Risk management is an increasingly important consideration for underwriters.

Daniel Prince of Barbican suggests that: ‘... larger firms continue to see claims arising from work undertaken prior to the more robust risk management regimes that are currently in place. A current challenge for firms is the change from a paper to an electronic filing system and in some cases we are hearing of associates who file in three different fashions depending on the partner they are working for. This obviously has a knock on impact in terms of

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2Note the change in terminology – the SRA has dropped the term “Qualifying Insurer” in favour of “Participating Insurer” to avoid giving the impression that insurers have undergone any vetting process or similar in view of the recent well-publicised problems with Quinn and Lemma – see article section ‘unrated insurers’.3Rule 6, SRA Indemnity Insurance Rules 2012


peer review, picking up others’ work and defending negligence claims if files are not complete.’ He predicts that improved systems and risk management will lead to a significant reduction in claims against firms with adequate resource to implement them.

The significance of external investment should not be underestimated. Globalisation and alternative business structures (ABS) will require increasingly sophisticated underwriting. Those insurers which get to grips with the legislative nuances of other jurisdictions will reap the rewards of gaining a firm’s confidence. By the same token, however, firms must be able to demonstrate they are keeping pace with local changes in their satellite offices.

Longer termThere is unlikely to be any significant short-term change in premium levels, as underwriters adjust to providing run-off cover when their insureds become insolvent, rather than insuring insolvent firms in the ARP on a pro rata basis according to their market share. For insurers, the advantage is that the cost to them of insolvent firms will depend on the capability of their underwriting function, rather than on their market share. Those insurers which are developing a more sophisticated approach to choosing risks will have a competitive edge. That the Law Society Gazette reported in June 2013 that 30 of the top 200 law firms are in serious financial difficulty will, however, weigh heavy on the minds of those with experience of the market, particularly those who have been burned before.

The downside to the new approach, of course, is the cost to insurers when they write a bad risk. There may be pressure on claims teams to downplay

claims experience so that underwriters can offload a bad risk to a new insurer and avoid being left holding the ‘run-off baby’.

The move away from a single renewal date has divided opinion. Some believe it is likely to lead to increased competition, by reducing stress on the market and enabling better analysis by underwriters of the financial health of smaller insureds, which have historically fallen into the ‘uninsurable’ bracket as a result of their size or the nature of work they undertake, irrespective of claims histories, internal controls or financial and risk management profiles. Others doubt the stress on the market will be removed because (1) traditionally, underwriters bolster their teams for ‘solicitors’ season’ and (2) solicitors’ renewal falls at a convenient time in the calendar year when other lines are less active. Further, it is clear that not all insureds will benefit from closer analysis of their financial health. Some have undoubtedly benefited previously from hasty underwriting decisions.

The Legal Services Consumer Panel has recently suggested that the sector should adopt a single professional indemnity insurance and compensation scheme, with premiums being based on the type of work undertaken by the practice. It may be that firms undertaking riskier lines of work should bear the brunt of high premiums. Some have, however, expressed concerns that this approach would lead to the closure of many firms with serious consequences for consumers.

So, is it all doom and gloom?Much depends on your viewpoint. There is a downturn in the number of issued claims. Rates are likely to

remain relatively stable (if anything, increasing slightly), except for firms with heavy conveyancing practices and poor claims histories. As one unrated insurer leaves the market, another takes its place. The same goes for rated insurers: some are not writing new solicitors’ business (e.g. RSA and Aviva), while others have increased appetites or are considering re-entering the market following the closure of the ARP.

Insurers are looking to gain a competitive edge, whether that be by focusing on providing global insurance programmes to larger firms or by introducing improved risk profile scrutiny across the board. Underwriters’ exposure to the cost of insuring ‘uninsurable’ firms will now be determined by the sophistication of their underwriting operation, not by their market share. Those which insure practices with sound financial futures should see costs incurred during run-off return to an acceptable percentage of premium income. This is good news for insurers and, in the longer term, their insureds.

For the future, the SRA will be looking at credit ratings for insurers and whether to narrow policy terms (generally or for specific practice areas). Both options come with health warnings for firms with bad claims histories, or practice areas which are commonly susceptible to claims, or both! The future seems gloomy for firms with poor claims records, but most (with the notable exception of PI lawyers!) will say: ‘Good riddance!’

Ruth Lawrence Partner and Head of Insurance +44 (0)151 600 8266ruth.lawrence@ hilldickinson.com


view from the market


Angela: We will deal with all cases on their merits, as we currently do.

Carolyn: I don’t think we will defend more cases to trial, as we’ve always taken a fairly rigorous approach where we think there is fraud or exaggeration, and we would continue to defend those cases.

I think insurers and corporates have to think very hard about whether they do defend cases in the portal, where their points on potentially contributing negligence or other points, but I think where there are really strong points to defend them we would continue to do so.

I think we will see more satellite litigation around clarification of some of the rules, so there may be more litigation potentially there.

Frances: It is too early to say whether we will defend to trial more claims, but certainly now claims will be dealt more than ever on their merits, whereas in the past mounting claimant costs may have played a more prominent role in the settling of claims. Whether that will lead to more claims being defended, I’m not really sure at this stage. I do wonder whether or not the reforms will mean that fewer spurious claims are actually brought in the first place and they would have been the ones that we would be defending. So we will have to see how that works out in the coming months.

John: Good question! I think the answer at the moment is I don’t know. Clearly, every claim needs to be judged on its merits. If I have to guess now, I would say it probably will not make a great deal of difference - as we don’t defend to trial unless we think it is a claim that morally we should be defending.

Will you defend more claims to trial as a result of the civil justice reforms?

This issue’s key questions: This issue’s panel:

Angela Doran, Insurable Risk Department Claims Manager, TESCO

Carolyn Mackenzie,Complex Claims & Strategic Director, RSA

Frances Stapleford,Assistant Vice President, Claims, Generali

John Windsor,Head of Insurance, Marks & Spencer


view from the market continued >>>

Angela: The main challenge for us as a corporate is ensuring that the right processes are in place, to ensure that we can comply with the portal timetables and as a corporate, it is always important for us to make sure we are seen to be doing right thing.

Carolyn: That your people are well trained, understand the timelines and requirements for investigation, are able to make rapid decisions over us having an internal loss adjusting field force is really valuable to turning those cases around and making decisions quickly. I think that’s the biggest challenge.

Frances: I think the main challenge is the extension of the portal to EL and PL claims, which represents a major change in the way that claims are handled with very fast turnaround of decisions. I think this means we will have to be better prepared, do our investigations earlier and work very collaboratively with our clients to ensure that we are fully prepared to deal with those claims when they come in.

John: I think primarily to make sure that we are ready for the changes, which I think, as a company, we are. Also, to make sure that we have got systems in place to monitor progress of how claims and the system develop and to make sure we are robust and nimble enough to react if we find things are going wrong.

It is very important to make sure that we keep the momentum going but also, equally, from a customer and from a colleague point of view, to make sure that anyone who does have an accident in our shops does have access to justice. The thing for me is to make sure that we keep on top of it and ensure that it works.

What is the main challenge you have faced/are facing as a result of the implementation?


Lloyd’s ‘science of risk’ prize 2013The competition will capture sector thoughts on how various risks will affect the insurance industry. This will ensure that insurance pricing fairly reflects the risks posed by various sectors or perils.

Please visit lloyds.com/scienceofrisk for the application form and full competition details.

science of risk prize


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Contact Ruth Lawrence on 020 7283 9033 or [email protected]

insurance leaders autumn 2013

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