NEXT time you pour yourself a coffee, or ask for a double latte on the way into work, spare a thought for how that little bean has changed the world. And I don’t mean simply by giving millions of people a little extra pep in the morning.
Back in the 1690s, Edward Lloyd had a coffee shop in the City of London. Sipping cups of “mocha”, merchants would pore over Lloyd’s list of forthcoming voyages, and insure ships against shipwreck or loss. Today Lloyd’s still insures ships, but long gone are the days when it was simply a Starbucks with a difference.
Lloyd’s insurance today threads its way through the world’s economies; 96 per cent of FTSE 100 companies have Lloyd’s policies, as do the world’s top ten banks, top ten pharmaceutical companies and top five petroleum groups.
Why do they come to us? Partly because, when disaster strikes, Lloyd’s has a reputation for honouring its word. Two years ago, on September 11, 2001, that reputation was tested like never before. After those horrific terrorist attacks, some doom-mongers predicted that Lloyd’s would not be able to meet our claims. But we have done, so far paying out $4.2 billion (£2.4 billion) in direct and reinsurance claims.
Gone are the days when people talked of Lloyd’s as a sinking ship, slipping under the waves to the tolls of the Lutine Bell. New standards have helped to weed out pockets of underperformance. Opaque accounting practices are ending.
Lloyd’s needs to be fighting fit. Insurance is not there simply to pick up the pieces when disaster strikes. We also insure entrepreneurs and inventors, helping them to innovate, test and create. In a world facing new risks — such as terrorism and global warming — insurance rebuilds and enables.
But there is one trend that is making insurers’ lives harder. It is pernicious and manmade. It is the compensation culture.
One of the greatest attributes of Anglo-Saxon culture has been its approach to risk. From our island, men and women have explored the globe, setting up home and trading in the furthest reaches of the world. Extreme risk was part of their lives. And for those less intrepid, when accidents struck or misfortune knocked, there was a gritty resolve to struggle on. Accidents happen, and life is unfair: or so most people thought.
Nowadays, when something goes wrong, or someone gets hurt, the injured party often wants someone to blame. America has led the way. Its “can-do” culture has become “can-sue”. Suing someone has become an expensive national pastime, costing $721 per US citizen in 2001. That’s $205 billion in all. And it’s rising all the time.
This over-prescriptive, over-lawyered culture is now over here. Obviously individuals need to be able to seek redress if they are injured thanks to negligence of others. But consider what’s happening.
Poppies for Remembrance Day? Better not use a pin, or you might be sued if it pricks someone. Fireworks parties on November 5? Too risky — one might misfire and someone might sue, you never know. Smash plates at a Greek restaurant? Just think what might happen if someone ate shards of china in a moussaka — better to be safe than sorry.
This culture is plundering the UK economy. The average cost of employers’ liabilities claims has increased by over 100 per cent in the past five years. Changes to personal injury law have increased claims costs by 40 to 50 per cent. Actuaries predict, together, it is all costing UK plc about £10 billion a year — 1 per cent of GDP. That figure is rising at 15 per cent a year.
Private and public sector alike have been pummelled by claims. Clinical negligence cost the NHS £6 million (in today’s prices) in 1974-75. By 2001-02 it cost £446 million. It’s the same story at the Ministry of Defence, where compensation and legal costs quadrupled to nearly £100 million.
The cost of higher insurance premiums, legal fees, admin, all dribbles down to you — the consumer and taxpayer.
And who’s benefiting? You may think that insurers should be whooping for joy at the thought of rising claims. Far from it. In recent years, for every £1 of premium income received, £1.47 has been paid out in claims. Nor are there hordes of claimants holidaying in Barbados with their compensation. The National Audit Office found that in the NHS, the legal and administrative costs of settling claims exceed the money paid to the victim in the majority of claims under £ 45,000.
The real winners are the ambulance chasers, so-called “lawyers” — for many are not qualified, but are really just advisers. “No win, no fee”, they hiss, luring anyone with a possible claim into court. After the “have-a-go hero”, we now have the “have-a-go victim” — go to court and try your luck.
Some things have changed. There is more mediation of cases, which has speeded up the process and reduced costs. There is greater clarity in the claims process.
But as claims across society increase, insurers, sadly, will have no choice but to increase premiums. We don’t want those rises any more than consumers. But if we do not have enough capital to cover policies, we risk not being able to meet claims, and our reputation begins to unravel.
The system we have at the moment is worse than a mess — it’s a blight on our lives and our economy. Politicians and regulators in Whitehall and Westminster need to wake up and, as Edward Lloyd might have said, smell the coffee.
Lord Levene of Portsoken is chairman of Lloyd’s of London
