The Cost of Compensation Culture

This paper considers what is “Compensation Culture”. We’ve reviewed a range of events for which compensation is paid and have estimated what these cost UK plc. The ball-park “cost of compensation” is roughly £10b per year, over 1% of GDP. This cost has been increasing at 15% per year recently and is set to continue rising at over 10% per year. Over a third of the total is legal and administration expenses. This seems a fundamentally inefficient way of delivering compensation. The paper includes the results of two surveys of the UK actuarial profession and the general public. The average view of practitioners is that Motor personal injury costs have inflated at 15% per year recently and double-digit inflation is set to continue. The continuing high inflation is mainly attributed to an increasingly litigious society and future legal changes. The majority of the “public” believe attitudes to compensation have changed in the last five years and that this is a bad thing. However, most of them would happily make a claim against the NHS or Local Authorities, but were less keen to claim against their employer or neighbour. Interestingly, a quarter of those surveyed didn’t know whether their Motor insurance policy included legal expenses or not and the public believes that insurers make a 15% profit on Motor insurance (!). We’ve summarized the current legal regime regarding compensation, reviewed how we got here and considered a number of scenarios for the future, drawing on the way compensation regimes have developed overseas. Whilst UK compensation costs have increased a lot in recent years, there are some fundamental differences between the UK and US which we think will stop costs spiralling to the dizzy heights achieved in the US (over 2% of GDP in recent years, but coming down). There are significant uncertainties about how the UK compensation regime will develop. The general view of the Working Party is that the way the current compensation regime is being allowed to develop is deeply unsatisfactory. There is no central focus (and hence control over) within government on the cost of compensation to society or how the compensation regime should work. Rather, the mechanism for Conditional Fee Arrangements, Before and After-the-Event insurance is being determined in an adversarial fashion by a series of test cases. This creates delays and uncertainty for compensators and accident victims and serves the interests of no one. Keywords: compensation culture, legal developments, condititional fees, ATE insurance, bodily injury