Research

Litigation Trends in Australia

In 2006, the Law Council published an independent study by Prof. Ted Wright, Dean of the Law Faculty of the University of Newcastle, entitled National Trends in Personal Injury Litigation: Before and After 'Ipp' .

The independent study examined the numbers of personal injury claims filed in the Supreme and District/Local/Magistrates Court each jurisdiction, according to each head of damages, between 1995 and 2005. The primary purpose of the study was to critically analyse the claims by the insurance industry and others that there had been a "litigation explosion" in Australia, or that Australia had developed a "culture of litigation" which needed urgent redress. The study also examined the impact of tort law changes in each jurisdiction

Professor Wright concluded that there had been no significant increase in litigation prior to the insurance crisis. However, the study also concluded that there had been an enormous reduction in the number of claims filed in the courts of most jurisdictions as a result of the subsequent changes to personal injury laws.

Insurer Profitability

The Law Council notes that insurers are entitled to earn profits on behalf of shareholders and, indeed, are required to earn the best return on capital they can achieve during the insurance cycle. However, high insurer profits since tort law changes were introduced, compared with average profitability prior to that period, may be one indicator that the pendulum has swung too far and that law reform is needed to ensure injured Australians get a fair go.

In 2005, the Law Council commissioned an independent actuarial report by Richard Cumpston (Cumpston Sarjeant Pty Ltd) entitled Higher Insurer Profits Allow Better Benefits to the Injured? The report demonstrated that insurers had gained over 20% return on capital since tort law changes were introduced. This is despite that, in the 11 years prior to 2004, average profits were in the range of 6-8%.

In NSW, the Motor Accidents Authority has indicated reasonable profits for compulsory third party (greenslip) insurers are in the range of 4-6% [MAA Annual Report 2003/4, p 103]. However, an examination of the MAA's annual reports reveals the following:

• Between 1 October 1999 and 30 September 2004 NSW CTP insurers:
  • Collected $6859m in CTP premiums (avg. $1372m p.a.);
  • Are projected to ultimately pay $3646m (avg. $729m p.a.) in CTP claim payments (53% of CTP premiums);
  • Are projected to pay $1412m (avg. $282m p.a.) in associated costs such as reinsurance and administration (20% of CTP premiums);
  • Are projected to make a profit of $1860m¹ (avg. $372 p.a.) which is equivalent to 27% of CTP insurance premiums collected (range $1324m to $2128m 19% 31%).²
• There has been a 24% decrease in the average cost of CTP insurance premiums in NSW since 1 July 1999 (from $418 to $319). However, over the same period of time there has been a 35% decrease in the projected ultimate claim per registered vehicle (from $367 to 237). This means that each premium paid is generating 11% more revenue over cost now than in 1999.
• It is interesting to note that around 90% of the total reduction in premiums occurred in the first year of the New Scheme. Since that time there has been no real trend in premium prices up or down despite profits in excess of 20%.

Details about insurer profitability are difficult to obtain, or unavailable to the public, in a majority of other areas of cover, as much of this information is treated by insurers as commercially sensitive. The Australian Prudential Regulation Authority (APRA) publishes data on public liability premiums and claims on its National Claims and Policies Database (NCPD). Unfortunately, whilst useful for analyzing changes in public liability insurance premiums, claim numbers, etc., the data really enables little more than inferences about the relative profitability of public liability insurers since tort law changes were introduced.

For example, the most recent NCPD reports (March 2009) reveal that during 2007, public liability insurers earned gross written premium of $1.659 billion. Of this, public liability insurers paid $695 million (approximately 42%) toward claims by their insureds. However, few conclusions can be drawn from this data, as the long-tailed nature of some public liability claims means that claims may be settled several years after the insured risk materializes. Therefore, gross premium revenue, less claims costs, tells us little about insurers' average profitability.

For this reason, the Law Council considers that the public should be informed by APRA about average profitability of insurers under different classes of insurance (public liability, motor accidents and workers compensation). This is important, given the entire basis for restricting the rights of injured people to claim fair compensation was high claims costs, higher litigation and, therefore, low profitability.

1. Discounted value.

2. Gould Adrian, Report to Motor Accidents Authority: Estimates as at 30 June 2005 of profitability of past NSW compulsory third party premiums written by insurers, 12 October 2005. Table 2.3 (p 6) and Table 10.2 (p 28).