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The Actuary The magazine of the Institute & Faculty of Actuaries

Don’t blame me

AS JULIAN LOWE EXPLAINS in his article onbodily injury trends, there have been anumber of developments in the pastfew years that have caused motorinsurers’ costs to increase. In essence, the developmentsmean that more people are makinginjury claims, and each claim costs more thanbefore.These changes are worrying for motor actuaries.Injury claim frequency and severity willchange, as will reporting and settlement patterns,but nobody yet knows quite how they willchange. The only thing we can say is that historyis a less useful guide to the future than before.However, this editorial is not about the woes ofbeing a general insurance actuary. It is about thegrowth of the compensation culture in the UK and inmany other countries around the world.It is fairly common in the UK to be stopped in thestreet by an employee of a motoring organisation andasked if you have considered taking out breakdowncover. It is becoming increasingly common for peopleto be stopped and asked if they have fallen over or hadan accident in the past few years, and if they wouldlike to blame someone else in the hope of winningthousands of pounds in compensation.It is undeniably right that people who might nothave previously had the resources to pursue a validclaim can now afford to do so, thanks to changes inthe law. What is less right is the changes in public attitudeto blaming and claiming for things that are justpart and parcel of everyday life. If you walk off a cliff,it is now the cliff’s fault.The claims industry’s advertising and the methodsused to find potential claimants have undoubtedly ledpeople to be tempted to chance their arm. I readrecently about a man who grew up in an orphanage,and received a letter from a solicitor he had neverheard of, asking if he had been well treated, and if hewas interested in making a claim.How are insurers affected by this general change inpublic attitude? More claims means that, in the longrun, insurers will charge higher premiums. Higher premiumsmeans higher profits, if insurers price theirproducts properly. Surely insurance companies areamong those who gain from the compensation culture.I suppose there are similarities between the insuranceindustry and the claims industry. Both are means oftransferring money from one person or group toanother, with someone keeping a bit for themselves.The difference is that the insurance industry wasbuilt on the idea that people shared financial risk, andthe fact that people preferred a small, regular outgocompared to large and unpredictable outgo. Insuranceincreases utility and symbolises people’s reliance on one another. Economic development has benefitedfrom the existence of insurance: individuals and firmswould have been able to take fewer risks without it.On the other hand, the claims industry, in promotinga compensation culture, has the opposite effect onsociety. Individuals and firms are likely to be less willingto take risks. People may be less willing to lend ahand for fear of being sued. In a way, it breaks downsocial solidarity. In the US, some doctors are so afraidof being sued that they will now only treat healthypeople.Insurance protects and indemnifies; the claimsindustry is vengeful and allocates blame.Is what we have seen recently the start of an irreversibletrend, or can something be done to nip it inthe bud?In 1995, most UK insurers signed up to the ABI subsidenceagreement. This was devised as a fair way forsubsidence costs to be allocated between insurancecompanies, without the need to engage in lengthy andexpensive debates about who was at risk when the subsidenceevent happened.There are clear reasons why this approach couldn’tbe applied to personal injury claims – it is evidentwhen subsidence takes place, and the cost of putting itright can be easily established, but this is not the casefor injuries. However, if there can be found a sensibleapproach to allocating compensation, at least forstraightforward cases, that avoids the need to gothrough lengthy and costly legal proceedings, it wouldbe well worth pursuing, for insurance companies andfor society as a whole.