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The Actuary The magazine of the Institute & Faculty of Actuaries

Third UK bodily injury awards study

The Third UK Bodily Injury Awards Study was commissioned by the International Underwriting Association of London (IUA) and the Association of British Insurers (ABI). It investigates injury claims trends in the UK and the forces driving them, and is the biggest exercise of its kind ever undertaken.

The first two UK bodily injury studies, published in 1997 and 1999, have become recognised as authoritative information sources. The second study concluded that:

  • bodily injury claims had been rising at an average of 11.7% pa from 1989 to 1999, reflecting both greater severity (cost per claim) and frequency (number of claims);
  • the rate had been highest (13.8% pa) for the period 1994–1997;
  • the House of Lords decision in Wells v Wells had contributed substantially to claims escalation;
  • conditional fees and the rise of after-the-event insurance had helped to make litigation risk-free for claimants; legal factors were likely to continue to push up claims costs;
  • there were no serious technological or commercial barriers to the development of an industry-wide database of bodily injury claims, whose wide-ranging benefits would include swifter, more consistent claims settlement and improved reserving.

The second study also investigated the use of rehabilitation by the insurance industry. It included a voluntary rehabilitation code and an accompanying guide to encourage greater take-up by insurers and personal injury lawyers.

The third study

The third study takes up many of these themes. Its findings stem from research carried out by four working parties.

  • The Actuarial Working Party has analysed more than a million claims and updated its findings. It has been able to provide more detailed analysis than ever before, partly as a result of improved data quality.
  • The Legal Working Party has provided a thorough account of the wide-ranging changes that have taken place since the last report was published and has assessed possible future trends.
  • The Medical Working Party has investigated the increased use of prosthetics, such as artificial limbs, and their impact upon the claims process.
  • The Rehabilitation Working Party has considered the growing use of rehabilitation by the insurance industry. It also publishes an updated code and guide, and draws attention to research into the psychological aspects of injury.

Main findings

Claims trends
The cost of bodily injury claims to UK motor insurers has risen by nearly 10% pa over the past decade. The rapidly changing legal environment and cost of medical treatment have played a big part in this increase. The cost of bodily injury claims rose by 117% between 1992 and 2000 (at the same time national average earnings rose by 37%).

Payments by reinsurers on bodily injury claims above £250,000 have gone up by more than 20% pa. This is over twice as fast as in the primary market and reflects the growing number of claims that reach reinsurance layers.

Average claims severity has increased at an annual rate of 6.7%, average claims frequency by 3.0% pa. There was a significant drop in the number of claims under £1,000 between 1998 and 2000. Claims frequency at other levels continues to rise, especially between £5,000 and £15,000.

Personal injury (PI) claims accounted for more than 33% of motor premiums in the 1998 accident year. The 1999 accident year looks like being similar, while there was some improvement in 2000 owing to rising premium rates. Although the latest figures fall below the 36% recorded in 1997, loss ratios (claim costs to premiums) still doubled during the period 1994–1999.

Legal costs as a percentage of motor PI payments have remained remarkably constant at around 30%. This means that they continue to increase by more than double the rate of national average earnings, costing around £1bn pa (equivalent to approximately 9% of premium income).

Insurers and reinsurers have had to strengthen reserves for claims over £100,000 in response to legal changes over recent years, many of which have had a retrospective effect.

Legal trends
Hardly any aspect of bodily injury law has been left untouched in the past three years, and there are still many potential changes in the pipeline. The net effect has been to increase the cost of bodily injury claims to insurers at well above the rate of retail price inflation.

Factors affecting claims severity include further reductions in the discount rate, the Court of Appeal’s decision to increase general damages for claims above £10,000, and increases in recoverable hospital charges . Factors affecting frequency include increased awareness among claimants of their rights and the public’s relatively risk-free access to litigation.

The Woolf reforms appear to have achieved an improvement in the speed of settlement. The introduction of pre-action protocols and civil procedure rules has led to fewer claims proceeding to trial.

Medical trends
Medical costs continue to rise at a rate significantly higher than retail price inflation.

The use of prosthetics has grown in both frequency and scope, contributing to the improved well-being of accident victims. However, it has also added to potential claims costs, and can be expected to continue doing so for the foreseeable future.

A high proportion of amputees in the UK (over two-thirds) return to some form of employment, but this rate is lower than in many other European countries. Targeted vocational rehabilitation and a more proactive approach from the insurance industry towards prosthetic rehabilitation could increase the rate of return to work.

Rehabilitation trends
The use of rehabilitation by insurers and PI lawyers has increased substantially since the publication of the rehabilitation code. Reinsurers have played a significant part in encouraging this change. But much remains to be done to promote the concept of rehabilitation, with many bodily injury claims still proceeding without any consideration of rehabilitation. There is a wide range of attitudes towards rehabilitation among both insurers and PI lawyers.

Since the publication of the second study there has been a surge in the number of private sector medical and vocational case managers and other care providers. Some insurers and PI lawyers complain, nonetheless, about a continuing skill shortage and inconsistency of service quality. The recent establishment of the Case Management Society of the UK is intended to create a professional framework for case managers.

The psychological aspects of injury are often overlooked and underestimated.

Overall conclusions

This study demonstrates conclusively that claims for UK motor bodily injury continue to escalate much more quickly than general inflation. Although there has been a temporary reduction in the rate of claims escalation, the cost to insurers continues to increase at over twice the rate of the national average earnings index.

Furthermore, there is every prospect that legal changes and the rising cost of care will add to these inflationary pressures. Insurers would, therefore, be well advised to plan on the assumption that claims costs will continue upwards for the foreseeable future.

Faced with increased costs, insurers are adopting a more proactive approach with a view to earlier involvement in claims management. Rehabilitation can be expected to play an increased role in the claims process, even though its adoption is hampered by a number of factors.

The fact that, with one exception, every large and medium-sized UK motor insurer contributed data to the study (as well as several smaller insurers) shows that the industry sees value in pooling claims information to gain a better understanding of market trends.