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The Actuary The magazine of the Institute & Faculty of Actuaries

Motor bodily injury trends

One of the big uncertainties for a general insurer is the cost of bodily injury (BI) claims. It is widely accepted that BI costs have experienced double-digit inflation for the past decade or so. One of the reasons for soaring costs is a series of legal changes. This article describes some of the legal changes in recent years and those that are still hanging over the industry.

Recent legal changes
– Compensation Recovery Scheme (1997)
Changes to the Compensation Recovery Scheme came into force in October 1997 and removed the threshold below which the Department of Social Security (DSS) did not previously seek recovery of payments to individuals when they received compensation from other sources (such as insurance payments). Basically, the DSS claimed back some of its costs from insurers adding a couple of per cent to motor BI inflation.
– Ogden multipliers increased (1998)
When someone is injured in an accident, they usually receive a lump sum payment to compensate them for loss of earnings and to pay the cost of future care. The standard set of multipliers used to convert future costs into a lump sum come from what are called Ogden tables, after Sir Michael Ogden, who initially produced a report on this subject.
Although the use of the Ogden multipliers has been accepted for some time, there have been a number of test cases centring on exactly what interest rate to use. In July 1998 the House of Lords ruled on a number of test cases, ruling that multipliers should be calculated at a net 3% interest rate, rather than 4.5% as they had been until then. The judgment added maybe 34% to motor BI inflation.
– NHS charges (1999)
The 1999 Road Traffic (NHS Charges) Act introduced a new regime whereby the NHS could claim back higher amounts from insurers for the cost of treating road traffic accident victims. Again, this added a per cent or two to motor BI inflation.
– Level of general damages increased (2000)
General damages are the fixed amounts of money that one receives by way of compensation for pain and suffering. In March 2000, in a special Court of Appeal hearing, the House of Lords ruled that the level of general damages for pain and suffering should increase. The increases were between 0% and 33% on a sliding scale for damages over £10,000. The higher damages added another per cent or two to motor BI inflation.
– Ogden multipliers the sequel (2001)
While the 1998 test cases set a clear precedent, the Lord Chancellor instigated a consultation exercise (which finished in May 2000) to seek views on the interest rate to be used in Ogden multipliers. In June this year the Lord Chancellor announced a new rate of 2.5% another couple of per cent on motor BI inflation.
The changes described above create a double whammy for insurers. Current and future BI costs are clearly increased. However, because BI claims can take many years to settle, the costs for unsettled claims from four years ago or more also increase with no opportunity to increase the premiums that originally attached to those risks. The changes described have probably had a retrospective cost to the UK company market of the order of £1bn or more. Motor insurance is generally a commodity product, with high volumes and low margins. General insurance profitability has traditionally been very cyclical, and insurers might hope to make a return of a few per cent of premium over a cycle. The changes above have effectively destroyed the profitability of the motor market over the cycle.

Looking ahead
– Conditional fees/after-the-event insurance
Legal aid for most claims was withdrawn in April 2000. Since then, an increasing number of claims have been made on a no win-no fee basis. For these types of cases, an uplift in fees (success fee) is recoverable from the losing party. Typically, claimants take out after-the-event insurance (AEI) to finance making a claim if they lose, the insurance pays the cost of their premium; if they win, the cost of the premium is claimed from the losing party (as well as the success fee). So the claimant can’t lose! The new regime has seen a considerable growth in ‘accident management’ companies, which have advertised heavily to drum up claimants. There are still lots of legal grey areas about exactly what is recoverable, but one thing is sure the cost of claims for insurers is likely to rise, and the numbers of small compensation claims could increase considerably.
– Law Commission reports
There have been a series of Law Commission reports (LCRs) that have suggested various changes to the level or type of general damages. LCR249 suggested broadening the type of claimant who could claim for psychiatric illness/stress following a claim (relatives of those involved in an accident, for example); a further report, LCR263, suggested higher amounts of fixed compensation for cases of wrongful death.
The impact of conditional fees/AEI premiums and further changes to the level of general damages could cost the same again as the changes described from 19972001. So that’s why your motor premiums have been going up!