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The Financial Impact to the Goverment of the Jackson Reforms

I was invited to attend a quiz in a local pub last night by a friend. There were nine of us in the team. I think I had been brought in to shore up a perceived weakness in answering questions about After the Event Insurance (ATE insurance) but sadly, none came up. I did get one right about W.C. Fields though ('By what name was William Claude Dukenfield better known').

Anyway, to business.

I promised some further analysis of the MoJ consultation document but I think I would like to analyse the financial impact in terms of lost revenue to the Government first - so here goes:

  • There were 878,000 claims registered with the Compensation Recovery Unit in the period 2009/10 ( )

  • During the same period the CRU recovered £154,784,443.56 in treatment charges, so an average of £176 per case.

  • In 2008, After the Event insurance premiums totalling £96m were sold. Of these, it is estimated that £80m related to personal injury claims. The number of claims increased by 9% between 2009 and 2010 (that's due to the recession not the 'Compensation Culture') so applying this increase to premiums gives us £88m of ATE insurance premiums. That's £100 per case (it is low of course because After the event insurance won't be purchased in every claim). Insurance premium tax (IPT) of  £4.4m was earned on these premiums. The IPT rate is going up to 6% in January.

  • Fixed costs for motor claims are £1200 plus 12.5% success fee for the straightforward matters - a total of £1350. VAT on these costs totals £236.25 (soon to be £270 when the rate goes up)

  • In 2009 the UK Motor insurance market generated £9.8 Billion in premiums. Taking into account non-motor premiums, the total is heading towards £20 Billion.

So now let's make some assumptions and see what the loss is to the Government:

  • Let's assume the After the Event Insurance premium is no longer recoverable. We believe this will result in fewer Personal Injury claims as  it will put off claimants making a claim - ATE Insurance premiums may still be available but as they won't be purchased very often (only on the risky cases), the premiums will rise. This will have an upward spiralling effect and will reduce the number of claims. We estimate there will be a reduction in claims of  between 10% and 15% (let's say 12.5%)

  • That's 109,750 fewer claims

  • (This is a good one) As a result of fewer claims, motor and non-motor insurance premiums in the market will reduce by 5%

The loss to the Government in revenue will be:

Compensation Recovery Unit Recoveries (lower claims x £176)   £19,316,000
VAT on solicitors' costs  (lower claims x £270)   £29,632,500
Tax on solicitors' costs assuming 20% profit & 40% Tax   £11,853,000
Insurance Premium Tax (IPT) on ATE Insurance Premiums (£88m @ 6% IPT)     £5,280,000
IPT on lower Motor & Non Motor Premiums (5% of £20bn x IPT @ 6%)   £60,000,000
Total Income Loss to Government £126,081,500

So that's a conservative £126m each year lost in tax revenue. When you consider that this is over a third of the saving they are trying to make to legal aid, you realise how significant this is. Putting it another way, they could keep the Personal Injury claims system as it is, avoid all of the cost of changing it, and only make 64% of their planned cuts to legal aid.

Critics to this analysis will point out that the £60m I have allocated in reduced IPT from Motor and Non-Motor insurance sales is unlikely to happen. Some will say the big insurers won't be dropping their prices following the reduction in claims but will simply make more profit instead and pass it on to their shareholders. That's just cynical.

So back to the quiz - we came third. Out of er, five teams, losing to a team called 'Man in the corner' consisting of, yep, an old man sitting on his own in the corner.  Oh deary me.

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