Rights of motor vehicle accident victims now thrown into the firing line – Government Proposed Reforms to CTP insurance

Published 23 May 2016

What is now high on the agenda is the NSW Government's intention to introduce a no- fault defined benefits system for victims who have suffered injuries in motor vehicle accidents. The reforms in the most recent options paper released by the Government will effectively shape and change the lives of many Australians.

Readers should be mindful that the current Compulsory Third Party system is a common law fault based system, whereby victims can be legally represented in their dealings with insurance companies over compensation payments for the injuries sustained in the accident from the actions of the party at fault.

The current scheme provides added security and protection for victims who may not have sufficient knowledge of the law as to the level of compensation they are entitled to receive. All in all, it provides a level playing field.

However, in the latest paper released by the Government on options to reform the compulsory third party scheme, it has been suggested that in the last 3 years, the number of motor vehicle claims for serious and minor injuries have increased dramatically resulting in increased payouts from insurance companies and rising costs of green slip premiums.

Of concern was that the system was not serving injured victims as well as it could, considering that only 45 cents in every green slip dollar went to the victim, with the rest absorbed by insurance profits (19%) legal costs (18%) and scheme costs.

As claims have been litigated to enable injured victims to seek the maximum benefits according to each victims own particular needs and circumstances, this process has generated uncertainty for insurers in the calculation of their premiums, since payments for comparative like for like injuries have varied.

As such, insurers factor in the risk of uncertainty when setting premiums leading to higher premiums in the short term and higher levels of profit when claims are settled for their actual value.

As a result, the compulsory third party system is now at a state where it is not running in the most cost effective and efficient manner for the injured victims.

An alternative proposed by the Government in the paper suggested that introducing a defined statutory benefits scheme for anyone injured in a motor vehicle accident would necessarily bring the down the costs of premiums.

What this effectively means is that injured victims will have access to defined benefits, where limits and caps will placed on medical treatment costs, limits on the length of time victims may receive payments for their wage losses and limits on the proportion they are entitled to receive before payments become suspended.

The suggestion behind the Government's proposed reform is that a defined benefits system will provide insurance companies with certainty in their financial forecasts with respect to compensation for victims through comparisons of like for like injuries. This would in turn prevent insurance companies from factoring in buffers, contingency costs and risks and thereby reduce the price setting of green slip premiums.

In truth, a defined benefits scheme embodies more far reaching ramifications.

As barrister Phillip Bates wrote in the Sydney Morning Herald, it is a one size fits all system whereby all victims are entitled to defined benefits without accounting for each victims stated needs and circumstances.

Injuries effect different people in different ways. For example, as Phillip Bates wrote, the loss of a finger might destroy a professional sportsperson's career, however the scheme would aim to treat this injury in the same fashion as a finger on the non-dominant hand of a desk worker.

The scheme is an unsophisticated system which has no regard to how injuries can change the lives of people differently. From a practical point of view, it will arguably remove a victim’s option to engage a lawyer for advice as to what payments from the insurance company are considered reasonable since such payments will be defined and set.

At worst, the victim will be exposed to deal solely with the insurance company, which further imbalances the playing field. One needs to bear in mind that the insurer represents the interests of the party at fault and not the interests of the victim, so how can we trust that the system is just and fair for the party who suffers?

It is crucial that the Government avoid implementing one sided solutions like a defined benefits system to keep premiums low.

There are other viable options to this. As noted in the paper, insurers are required to file their proposed prices with the State Insurance Regulatory authority (SIRA) and their future costs for claims including the profits.

Over the life of the scheme the discrepancy between the filed prices and realised profits of the insurers have been far apart, with realised profits being 19% that is more than double to what insurers file when setting prices. Surely, the Government may have a say in empowering SIRA with a stronger regulatory function on premium price setting from insurers than the current toothless "review" function.

Already the Government has put in place regulated costs and caps on certain aspects of legal services charged and cost reporting obligations on legal services to keep watch of what lawyers are charging victims and much the same can be applied to insurers to ensure costs contributed to premiums are allocated efficiently.

The current system must be reformed effectively, through demanding a unified commitments from all stakeholders. The general public should be not at the expense of these reforms from having fair access to justice for wrongs committed by another party. We ask claimants to come forward to write to their local MPs about how the current fault based system has compensated them effectively and adequately for their pain and suffering.