The after-the-event legal expenses market could be cut in half, threatening tens of millions in premiums, following proposals to overhaul the personal injury system unveiled by the government this week.
The Department for Constitutional Affair's (DCA) long-awaited reform of the compensation system proposes the introduction of a fixed fee tariff for medical and legal costs (see box).
This would strip out additional costs from the current system, rendering after-the-event insurance premiums unnecessary in many cases.
ATE insurance funds legal actions against insurers and helps pay for medical and legal reports.
In 2005, the ATE market was estimated to be worth £120m. The market makes the vast majority of its profits by selling cover on low risk cases valued at less than £2,500.
"In cases where liability is admitted no ATE premium is needed," said Dominic Clayden, Norwich Union's technical claims director. "It will get cases back to being dealt with as an insurance matter rather than piling on the costs."
"There is a possibility that legal expense insurers are going to be cut from cases worth less than £2,500," added Nick Gunter, head of technical claims for Fortis. "It would seem that the market's model will have to change.
Arag Legal Expenses underwriting manager, David Haynes, said it would initially mean that in cases where liability is disputed premiums would rocket.
"Potentially there will be a lot fewer cases, but where there is a liability dispute over quantum premiums will be much higher," he said.
Allianz Cornhill Legal Protection was reluctant to comment on the paper. A spokeswoman said it was "still digesting the document" and its implications.
Insurance Times Future of Personal Injury conference on 4 July in London will discuss this and other issues.
