EMPLOYERS LIABILITY CLAIMS BENCHMARKING

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1 EMPLOYERS LIABILITY CLAIMS BENCHMARKING Claims analysis of the UK s largest construction companies Risk analysis and insight

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3 Benchmarking Exercise 3 INTRODUCTION JLT Construction has a track record of working with clients and prospects to provide insight and increased understanding of their risk issues. Within this paper, we detail the findings of our second employers liability benchmarking exercise. Employers liability is an excellent class of insurance to analyse, as statutory requirements mean the policy coverage is very consistent. As a result a potential variable is standardised, enabling a more direct comparison across participants.

4 4 EMPLOYERS LIABILITY METHODOLOGY Our 2016 benchmarking exercise was aimed at the largest building and civil engineering contractors in the UK market. Invitations were issued to 25 businesses, 13 of whom are JLT clients, with a 52% participation rate (69% amongst JLT clients). Data was obtained from each firm in relation to: 1. Claims experience for each calendar year for the period 2009 to Claims from 2015 were deemed to be insufficiently mature for analysis and so were excluded from the data set. The information provided by participants included the: Date of loss Amount paid Outstanding reserve Closed date (where applicable). 2. Exposure information for the company, being the employers liability declarations for manual wage roll (including labour only subcontractors, agency staff, etc.) for the relevant periods. Analysis of this data has enabled JLT to develop statistics for key metrics relating to employers liability exposures, both holistically and for the individual companies. To protect participant confidentiality only the overall results are publically available and are detailed herein. We have also completed a comparison between the 2014 and 2016 results. It is important to highlight that while some of the participants differ, the format of the data is identical. In 2014 JLT Construction analysed the claims data of the 18 participants over the period 2007 to Losses below 1,000 and in excess of 1 million have been excluded from the analysis of average claims costs and total costs relative to exposure. The lower threshold is intended to avoid skewing due to reporting differences between the participants where a large number of small value claims or investigation fees only may distort the results. The upper cap is to avoid the results being distorted by one or two very large individual claims. The actual claims settlement amounts have been used without any arbitrary allowance for trending or development applied. It is important to note that, on this basis, any apparent improvement in recent years may be explained simply by the immaturity in the loss development profile. Considering 7,270 claims (up from 4,830 in 2014), the aggregated data set has significant statistical relevance. This is evidenced by a total exposure value of more than 12 billion over the period 2009 to 2014 (circa billion for the 2014 benchmarking exercise).

5 Benchmarking Exercise 5 KEY METRICS Four main areas have been considered in this exercise: CLAIMS FREQUENCY The number of claims relative to exposure being the wage roll of the company in respect to employers liability. Within the analysis we have calculated frequency as the number of claims incurred for each 10 million of wage roll. This approach equalises the data to a common base level allowing comparison of participants. TOTAL COST AS A PERCENTAGE OF EXPOSURE This metric is calculated by taking the total claims cost (paid and outstanding) and expressing it as a percentage of the exposure figure. This also leads to a consistent basis of comparison and is useful in understanding the true cost of accidents relative to the cost of the resource itself. AVERAGE COST PER CLAIM This metric is the total cost of claims (both paid and outstanding) divided by the total number of claims. Care has been taken not to falsely inflate the number of claims by removing reported losses that have not incurred sufficient cost, which suggests a payment for investigation or defence costs only rather than a claim. AVERAGE SETTLEMENT TIME In our experience, proactive claims handling is a clear pathway to a better managed claims experience and as a result reduced cost. Claims that are left to progress at the claimant s schedule tend to settle for additional costs, due to a combination of increased solicitors fees and the loss of evidence over time. One rationale behind this metric was the desire to seek evidence to link the speed of settlement to increased claims cost. Notwithstanding this, there must also be a risk that claims settled too promptly, without due scrutiny, will also lead to above average claims costs.

6 6 EMPLOYERS LIABILITY FINDINGS CLAIMS FREQUENCY The metric measured is the number of claims per 10 million of exposure (manual wage roll). For the complete group of participants, the average number of claims per 10 million of wage roll was 2.93 with a significant range of results either side of the average. Contrary to our expectations, there has been a 19% increase in the claims frequency since the exercise was completed in Following the implementation of the Jackson Report recommendations in April 2013 and the extension of the Ministry of Justice (MoJ) portal to employers liability claims later on that year, we had anticipated there would be fewer claims following the banning of contingency fee arrangements (CFAs). Previously claimants had been allowed to proceed on a no-win, no-fee basis, and permitted the claimant s solicitor to recover a success fee from the defendant or its insurers if the claim was successful. It is evident, at least for the data set analysed, that the legislative reform has not reduced the volume of claims though the impact may be instead on the average claim cost (see next page). Of course, it is not possible to identify how the claims frequency may have been impacted had these reforms not been implemented; we may have been looking at much bleaker figures. We expect that future exercises will provide more insight into the impact of the Jackson Reforms in the longer term % CHANGE 2016 VS % Inflation on wage roll has not been accounted for. As the cost of manual labour has increased over the period 2014 to 2016, then in real terms the increase in claims frequency has increased by greater than 19%.

7 Benchmarking Exercise 7 AVERAGE COST PER CLAIM The average cost per claim for the 2016 exercise was just below 23,700, which includes own and claimants solicitors costs. While we have seen an increase in the frequency of claims (relative to exposure), the trend has not been repeated in this metric. The average cost per claim has remained remarkably constant since the first exercise. This is an encouraging development. Claims inflation has historically been a problem with annual increases in the region of 5%. Our analysis indicates that despite the increase in frequency, the variation in the average cost per claim was insignificant , ,306 % CHANGE 2016 VS % What might be the reason for this positive development? To what extent can it be attributable to the MoJ reforms following the Jackson Report? It is our view that the introduction of the portal for management of low value claims, combined with the fixed/predictive cost regime should be effective in staving off the effects of claims inflation in the medium term and as a result average loss levels should remain unchanged. Whether this trend can be maintained remains to be seen but we will be watching this metric closely.

8 8 EMPLOYERS LIABILITY TOTAL COST AS A PERCENTAGE OF EXPOSURE The total cost of claims within the exercise as a percentage of the exposure was up 18.3% to 0.71%. An increase in frequency versus exposure with a level cost per claim will logically result in an increase in the total cost of claims as a percentage of exposure when compared to the 2014 benchmarking results. For the sake of clarity we confirm we have not made an allowance for cost inflation in the manual wage roll exposure. As detailed above, there has been inflationary pressure on construction industry wages over the period considered meaning that this metric, in real terms, has increased by substantially more that 18% % % % CHANGE 2016 VS %

9 Benchmarking Exercise 9 AVERAGE SETTLEMENT TIME Only claims which have been finalised are considered when calculating the average settlement time. As a matter of concern, our evaluation found that there has been an increase in the average time to settle. In our experience a proactive approach to claims experience is a key way of managing claims cost as solicitors costs grow steadily on both sides. A similar approach to rehabilitation and return to work is in the best interests of both claimant and defendant. The MoJ reforms implemented in 2013 were introduced to streamline the claims process and as a result reduce settlement times. This is not yet supported by these results and there is anecdotal evidence from insurers and claims handlers to suggest that delays have arisen on post July 2013 cases. One explanation offered for these delays is that changes to claimant solicitors business models following the reforms have resulted in much higher individual caseloads ,007 days days % CHANGE 2016 VS % Again, this is an area which JLT Construction will consider further in future employers liability benchmarking exercises.

10 10 EMPLOYERS LIABILITY CONCLUSION In recent years there have been a number of steps taken to improve the management of personal injury claims within the UK. These have focussed on reducing the claims handling complexity and the associated attritional costs as opposed to the damages awarded, which have increased. The impact of these changes is yet to be clear. Having considered the employers liability claims data for the majority of the largest building and civil engineering contractors in the UK market we found that there is evidence that the cost of each claim has been maintained rather than reduced. The frequency of losses relative to exposure has however increased quite dramatically, once the real cost of construction wages is accounted for. The average settlement time for each claim also seems to be on the increase, although a reduction in volume of small value claims may be skewing the weighting of the results towards larger claims that take longer to settle. The claim periods used for the 2016 benchmarking exercise span the period in which the Jackson Reforms and MoJ Portal were implemented. As a result, the jury remains out as to the real effect of these changes on the major contractors employers liability risk profiles. IMPACT OF THE MOJ REFORMS It is tempting to interpret all of the results of this exercise in the context of the MoJ reforms and the implementation of the portal of EL claims. However, in reality, these reforms are likely to have had marginal, if any, influence on the results, in particular the comparison with the previous period. This is detailed in the diagram below. The claims from the 2014 exercise span the period 2007 to 2012 and this second exercise spans 2009 to The reforms were implemented on 31 July 2013 and as a result affect only the last 17 months of the second exercise. When analysing the data it is difficult to differentiate between any impact from these reforms and the normal phenomenon of claims development which is evident on all employers liability claims experiences prior to reaching full maturity. For this reason, we are unable to contrast any changes in the claims experience for the period post 31 July 2013 against the corresponding period in the 2014 exercise; those claims will have experienced an additional 24 months development. Any assumptions drawn of the basis of such a comparison would be invalid. We look forward to considering the impact of the reforms in future exercises. MOJ REFORMS ACTIVE 31/07/ EXERCISE 2016 EXERCISE

11 Benchmarking Exercise 11 This year s exercise has raised some additional questions which we will be considering when we undertake the analysis in 2017: Is there a relationship between high value and frequency? Do those participants with the highest value individual claims also exhibit loss experiences with a greater claims frequency? Is there evidence that the increased time to settle metric is being driven by a reduced volume of smaller value claims? The findings of the benchmarking results and recommendations arising therefrom are specific for each participant. If you would like JLT Construction to benchmark your performance in comparison to your peer group, or would like to participate in the 2017 exercise, please contact David Cahill, Julia Kenny or your usual JLT contact. Our experience of working with major UK contractors has emphasised the importance of companies understanding their claims profile in order to: (i) manage risk most effectively (ii) secure the best renewal terms and minimise your total cost of risk. ABOUT JLT CONSTRUCTION JLT Specialty Limited provides insurance broking, risk management and claims consulting services to large and international companies. Our success comes from focusing on sectors where we know we can make the greatest difference using insight, intelligence and imagination to provide expert advice and robus often unique solutions. We build partner teams to work side-by-side with you, our network and the market to deliver responses which are carefully considered from all angles. Our construction team is London s largest of construction broking specialists. For over 25 years, we have worked in partnership with our clients, delivering unrivalled service and innovative solutions which have challenged and continue to shape the construction insurance industry. Our integrated team of over 135 experts across service, broking and claims work together to provide exceptional service. A primary point of contact ensures our clients can access a team with the breadth and depth of experience to meet their risk and insurance needs.

12 CONTACTS DAVID CAHILL Business Development Leader, Construction JLT Specialty +44 (0) JULIA KENNY Account Handler, Construction JLT Specialty This publication is for the benefit of clients and prospective clients of JLT Specialty Limited. It is not legal advice and is intended only to highlight general issues relating to its subject matter but does not necessarily deal with every aspect of the topic. If you intend to take any action or make any decision on the basis of the content of this newsletter, you should first seek specific professional advice. JLT Specialty Limited The St Botolph Building 138 Houndsditch London EC3A 7AW Tel +44 (0) Fax +44 (0) Lloyd s Broker. Authorised and regulated by the Financial Conduct Authority. A member of the Jardine Lloyd Thompson Group. Registered Office: The St Botolph Building, 138 Houndsditch, London EC3A 7AW. Registered in England No VAT No October