Civil Liability Bill [HL]

Earl of Kinnoull Excerpts

2nd reading (Hansard): House of Lords
Tuesday 24th April 2018 Lords Chamber

[The Earl of Kinnoull (CB)]

My Lords, it is a pleasure to follow the noble Lord, Lord Hodgson of Astley Abbotts, who, as ever, was authoritative and full of charm. I declare my interests as set out in the register of the House and particularly those in respect of the insurance industry.

I also welcome this Bill, seeking, as it does, to tackle two distinct policy areas that are in need of reform. That reform, I believe, will benefit all in the country. I am looking forward to the passage of the Bill, which I hope will deliver these reforms in an optimal way, achieving the vital balance between the interests of all those concerned. To summarise two very interesting early speeches in the debate, from the noble Lords, Lord Beecham and Lord Sharkey, there is a great benefit to be gained from having certainty here. I do not believe that we in this House could feel that we had done our job unless we knew there was certainty on a number of the things mentioned in both those speeches. I certainly believe certainty will help.

The Explanatory Notes for the Bill point out that the UK generated 780,000 whiplash claims last year, which is one in 83 of our population. That is now down to one in 100. However, even the one in 100 statistic is worrying. In preparing for today, I came across a Daily Telegraph article entitled “UK ‘whiplash capital of Europe’”. The first paragraph says there are,

“one out of every 140 people claiming for a whiplash injury each year”.

That article was published in May 2011, so one in 140 has gone, via one in 83, down to one in 100. I am obviously delighted that it has come down, but one has to feel, as a bit of a cynic about the claims management industry, that at least part of that is probably due to its spending so much of its energy on some of the new and wonderful things, such as the holiday sickness scam. However, the figures are too new, and I would like to probe them. I have no doubt we will come back to those in Committee. The point is that it is a vast number of people.

We should also take a look here at other countries. I have run personal lines underwriting businesses in continental Europe, so I have some experience on the ground of what in other countries the number of whiplash claims should be. It is a heck of a lot less. Sometimes—for instance, in France—that is due to impediments, which I think are unfair, that are put in the way of allowing people to claim for whiplash injuries, but in markets such as Germany the number is remarkably less. I certainly remember going to meetings and spending the day with Munich Re, a major reinsurance company, in Munich, and people pulling my leg about what they call “the British disease”. It is one reason Munich Re was pulling back from reinsuring British motor insurance.

The noble and learned Lord the Minister, in his speech at the Association of Personal Injury Lawyers conference on 17 April said:

“The number of road traffic accident related personal injury claims remains around 70% higher than in 2005/06 and around 85% of these claims are for whiplash related injuries. This is despite extensive improvements in both vehicle safety and a decline in the number of reported accidents in recent years”.


That decline, in the past 10 years, was 31%, according to the Department for Transport statistics. So 31% fewer accidents, in safer vehicles, are producing 70% more whiplash claims.

All this whiplash-claims activity produces loss cost to the insurance industry. We in the industry of course reprice our products annually, so that cost is therefore charged on as a problem to you and to me. The removal of non-bona fide whiplash claims is estimated in the impact assessment to be worth £1.1 billion a year. The ABI has probed how much of that goes into the pockets of those who have had the whiplash, or allegedly so, and how much goes into the pockets of claims management companies and specialist solicitors firms. The answer is that about 50% goes into the pockets of those assisting the whiplashed people.

Our task, then, is complicated. We are aiming for a £35 a year reduction in annual premiums. We will need to come back to this in Committee, as I do not understand what the promise really is from the insurance industry in respect of the £35 that could be there for the saving. I am sorry to disagree with the noble Lord, Lord Hodgson of Astley Abbotts, but the industry is incredibly competitive, so I cannot believe that at least some of that will not naturally come back through competitive pressures. It is also true that people have been making these promises to their regulator, the FCA, which—I speak again with experience—is one of the toughest regulators in the world. It would certainly be pretty displeased with someone who had breached a promise to the general public and was not treating customers fairly. The fines for not treating customers fairly are very large. There is a certain amount of carrot and stick there.

On the personal injury discount rate, we have much to thank the House of Lords judges for in the case of Wells v Wells. They laid out the law with great clarity, a clarity that the noble and learned Lord, Lord Hope of Craighead, exhibited earlier in his seminal contribution. As ever, I learnt a lot; the noble and learned Lord never gets up without me learning. In March last year, the discount rate was lowered from 2.5% to minus 0.75%.

Oddly, this is the second time this year that we have spoken in this Chamber about discount rates, the other occasion being the debate on reconstruction and renewal, where we talked about discount rates in respect of the financial modelling, which gave very surprising numbers as to how expensive it would be to repair the Palace in some of the options being considered. That discount rate came from the Treasury Green Book and was 3%. I noted in that debate how sensitive things were and have looked for a precise example.

In the educational section of the Chartered Insurance Institute website, there is a worked example which is very instructive. It notes that when the discount rate was 2.5% the lump-sum settlement for a 20 year-old man who requires £100,000 of care per year for his lifetime was £3.2 million. When the discount rate changed to minus 0.75%, that £3.2 million rose to £8.9 million, almost three times the amount. That demonstrates just how sensitive it is.

That is why, in its latest annual report, NHS Resolution moved its reserves for past losses up by £4.7 billion and stated that it expected £1.2 billion to be added annually to the budgeted cost going forward for clinical negligence. All that is money coming out of the front line of the health service. This year’s budget for clinical negligence excluding the PIDR change is £1.95 billion, so the extra due to the change represents an increase of more than 60% in the cost for clinical negligence to the NHS.

The insurance industry, naturally, has had to increase its reserves. Noble Lords will have read all about the one-off pain of that, but the industry has the opportunity to reprice, so for classes of insurance such as employer liability and public liability the industry is now repriced and whole again.

Had Wells v Wells been heard in 2018, instead of 1998, a lot of argument would have been presented concerning the lessons learnt in the aftermath of the financial crash and, in particular, the effect that quantitative easing has had on the gilts markets. According to the Bank of England website, the Bank has bought £435 billion-worth of gilts and £10 billion-worth of corporate bonds. To put that number in context numerically, that is about 25% of today’s gilt outstandings. Quantitative easing was unheard of in 1998, and it has certainly had an effect on the very part of the investment market that Wells v Wells is tied to; indeed, that effect has been to depress the PIDR to its current level of minus 0.75%.

I accept that, mechanically, this number is what Wells demands but, like many noble Lords, I feel that it is completely wrong. I could say a lot about that at a high level, but it implies that investors will pay the Government to house their money over the decades ahead. I do not believe that that is credible or the lesson of history. The equivalent of the PIDR in France is 1.2%, in Ireland 1.5%, in Spain 3.5% and in Germany 4%. Britain is an outlier, as other noble Lords have pointed out. Rethinking the PIDR, therefore, is an idea whose time has come.

The Bill makes a good stab at things, but could the Minister give us a bit of colour on what,

“more risk than a very low level of risk”,

means? Indeed, I worry, as others do, that the whole of paragraph 3(3)(d) of new Schedule A1 on page 9 of the Bill is none too legally certain. Also, what timeframe does the Minister have in mind for when the expert panel will have reviewed the PIDR and the level either affirmed or changed? I am thinking, in particular, of the £1.2 billion clock that is ticking for the NHS.

I make one short final point concerning Scotland and Northern Ireland. Section 6 of the Bill refers to the role of the FCA, yet it applies only to England and Wales. I am concerned that this could create problems for the UK market and present a potential for the ever-creative claims management companies to arbitrage regulation between the different parts of the UK. The interests of the UK in this regard would be best served by having a single market and regulator. Is the Minister in touch with the devolved Administrations to ask whether they would be willing to make use of this primary legislation to improve the situation generally? I close by welcoming this Bill.