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The new road traffic accident claims process presented a number of challenges for after-the-event (ATE) insurance providers in the personal injury market. Now that many have changed their premium structures, the challenge for claimant solicitors is to check that their chosen scheme remains the most suitable one for their personal injury clients and is likely to avoid recoverability issues.

Considering the lengthy gestation of the new process, it was incredible that the timetable from release of draft protocol and rules in mid-February 2010 to implementation at the end of April was a period of just ten weeks. In that time, without inviting ATE providers to participate in the discussions about the process but insisting on confidentiality among those who were involved, the government seemed to assume that it was easy for ATE insurers to re-model premium structures, undertake actuarial calculations, set new premiums, change IT systems and market to their users.

In my office, we managed it '“ but this was no way to implement a major new scheme. I hope that if there are further changes to come to personal injury claims processes, whether as a result of the Jackson LJ report, government or 'stakeholder' initiatives, that we do not have a repeat performance.

Of course, with a new system, we have to make assumptions about the number of cases which will fall into the various categories. In the new RTA claims process, there were some key questions to be asked: What proportion of liability insurers would change their systems to be able to deal with the new process and be able to make liability decisions within 15 days of claim notification?

How often will issues arise which take cases out of the process, such as contributory negligence and causation? What proportion of cases will go on to Stage 3 for quantum hearings, and of those, what proportion will result in an adverse costs order?

Will defendant solicitors be acting on CFAs at Stage 3 hearings, thus doubling potential costs liabilities for those cases? What effect will the new process have on the volume of cases going to litigation? What changes, if any, will there be in the way in which claimant lawyers insure RTA cases?

There are of course no definitive answers to those questions '“ which is not what insurers and their actuaries want to hear when certainty is the preferred position.

Most of the main ATE insurance providers have now made their decisions and are implementing their new models. In the main these have resulted in significantly reduced premiums for cases concluding within the new process or, as in the case of Accident Line, in no premium for Stage 1 and 2 cases. But these changes have all had some knock-on effect on other premiums and are likely to mean that there may be little reduction in total premiums payable by losing defendants '“ instead a change in the distribution of where the burden lies. To understand the reasons for that requires an understanding of the basic principles underlying ATE insurance.

Underwriting principles

In Callery v Gray [2001] EWCA Civ 1117 and 1246, the Court of Appeal accepted that there are four main elements in calculation of a premium - the cost of claims; marketing and distribution; administrative and claims handling costs and insurer's risk profit.

Modelling assumptions are made about the make-up of the basket of cases, loss frequencies and claim costs for each type of case. The insurer calculates what is needed across the book of business to cover these elements, and decides how to break this down when setting a premium structure.

If the make-up of the basket changes, new actuarial calculations have to be made. For example, if significantly fewer cases are insured because solicitors do not insure until they know liability is to be contested, there will be a reduction in premium income. The same goes if premiums for cases settled early are reduced. But the same number of cases will still fail, and the cost of those will not change. So premiums for other cases will have to rise to meet the claims and the other associated elements.

Impact of the new process

Much, but not all, of the ATE insurance for personal injury cases is provided through delegated authority schemes on a contingent or deferred premium basis. Most schemes make it an essential requirement to insure cases at an early stage, approved in Callery. Schemes vary as to the precise stage by which this must be done. But it is important for insurers to minimise the risk of adverse selection '“ that only the riskier cases will be insured.

Until now, all policies carried some risk for insurers, irrespective of the stage a case concludes. Even if a case is abandoned pre-proceedings, there are own disbursements.

If liability has been admitted, there is still a part 36 risk.

However, in the new RTA process, risks in cases which conclude successfully in the first and second stages are removed. Cases where liability is not admitted in stage one fall out of the process and are dealt with in just the same way as before.

The risks, outlined in the box below, raise the question of whether liability insurers or other paying parties seek to re-open Callery and argue that it is premature to insure before these potential risks become actual risks.

Whether the likelihood of this will be affected by the amount of any premium is something we won't know for some time, but they are factors for claimant solicitors to assess at this stage.

Although it was tempting to change nothing in premium structures and wait to see whether there were defendant challenges to premiums in process cases we rejected that in Accident Line as being inconsistent with the intention behind the reforms, which we supported. Most other reputable ATE providers took the same view.

The key requirement for claimant solicitors is to consider what their ATE provider is now offering and whether it meets the needs of their clients.

Challenges to premiums

How will defendant costs negotiators approach the new models? I would hope that the major insurers involved in the government's claims process negotiations will find it embarrassing to continue the costs war in respect of process cases. But there are many other insurers and self-insuring defendants.

It will be good practice for a firm to make a note of its reasons for choosing a particular ATE scheme. This will assist compliance with the suggestion of the Court of Appeal in Rogers v Merthyr Tydfil BC [2006] EWCA Civ 1134 that if an issue arises on recoverability of a staged premium: 'It will ordinarily be sufficient for a claimant's solicitor to write a brief note for the purposes of the costs assessment explaining how he came to choose the particular ATE product for his client, and the basis on which the premium is rated '“ whether block rated or individually rated.'

The Court of Appeal did not, however, give guidance on the factors which might be relevant to the choice.

There are various possible factors to include in the note, if applicable to the particular scheme, such as the track record or of the scheme; whether the premiums offered by the selected scheme reflect the risks for each stage and case type and whether the scheme provides transparent premium.

Similarly, it could be noted that no commissions are received, or are disclosed if they are, and perhaps that there is no 'hold harmless' letter from the solicitor to the insurer or its agents.

The financial security rating of the insurer, whether it is regulated by the FSA and whether any intermediary is similarly authorised, are other possible inclusions.

These are factors which should also therefore drive the decision as to which scheme is best for the firm's clients.

Past experience of the costs wars would suggest that new battles will continue to occur, despite the best intentions of many. Let us all hope that, by demonstrating positively why a scheme has been chosen, claimant solicitors will avoid those battles in the future in connection with ATE premiums.

David Hartley is director of after the event services at Abbey Legal Protection, which manages the Law Society's Accident Line scheme. He was admitted as a solicitor in 1977 and was appointed a deputy district judge in 2003. Contact: d.hartley@abbeylegal.com