The UK Bodily Injury Awards Study published earlier this month shows that claims paid by insurers have been rising by around 10% p.a. for at least the past twenty years. The upward trend is unlikely to end any time soon, according to one of the study’s authors, Mike Brockman.
The Fourth UK Bodily Injury Awards Study contains a lot of good news for the insurance industry and can be seen as a tribute to its increased effectiveness and technical capability. Companies are identifying claims earlier, paying them more quickly and reserving more accurately.
Society, in the shape of successive governments and the judiciary, has seen fit to give insurers an ever-increasing amount of the burden of looking after injured people. The quality of care and compensation they receive is better than ever, whilst medical costs have been rising much faster than the rate of inflation. Our industry has shown itself equal to the task, albeit with inevitable consequences in terms of higher Motor premiums.
At the recent IUA seminar to launch the report, a number of people came up to me and said words to the effect: “This can’t go on indefinitely, can it?”
The short answer is that it can, and insurance managers have no choice but to assume that it will.
This study provides the best-ever snapshot of personal injury trends in the Motor sector. We analysed more than two million claims – some 75% of the total, rising to 90% in the most recent years. The data we received was, furthermore, of a high quality. It was a fantastic industry-wide effort, and there can be no doubting the picture that emerges.
It shows that the total cost of bodily injury claims rose by 9.5% p.a. in the past ten years. The annual average increase has been hovering around 10% for both decades covered by the four studies – and probably for much longer.
It is true that the most recent years have shown some encouraging signs of a slight reduction in inflationary pressures to around 7%, probably in response to a slowing up in the speed of legal changes. There is every possibility, however, that this modest dip will be short-lived. Legal developments already in the pipeline threaten to push it back up again – and those are just the ones we know about.
Above all, perhaps, periodical payments are something of a sleeping giant. At present very few have been awarded by the courts. If this were to change for any reason, the cost of settlement would take off.
The latest headline figure of 9.5% is made up of two components. Claims inflation, as defined by the increase in average claims costs, has been running at around 6.5% p.a., whilst claims frequency has been rising at 3% p.a. These figures hide, however, big differences depending on the size of the claim.
At the £2k - £5k level inflation is relatively modest, but there has been a massive upward trend in frequency. These cases typically involve whiplash, and legal costs make up nearly half the total paid by insurers. Their numbers have soared, despite a 19% reduction in the number of motor accidents resulting in death or injury over the past ten years.
Some people will argue that this trend proves there is an emerging claims culture, whilst claimant lawyers will say it just shows that people have greater access to justice. Either way, those responsible for pricing and reserving should assume that it will continue.
Some of the most striking figures, though, are to be found at the highest levels. The bigger the claim, the bigger the percentage increase in burning costs. Annual inflation was 6% below £80k, rising to 11% above £100k, 12% between £2 million and £5 million, and an eye-watering 30% for the very biggest claims.
In 2002, twelve claims reached £5 million, in 2005 the total was 19 and there may be more as others develop. We have already had two claims reaching £15 million, whilst another still to be settled has been reserved at £20 million. Richard Hone QC, who chaired the bodily injury seminar, described the picture as “a shattering thought … it almost makes one’s blood run cold.”
There are also significant variations by type of policy. Personal injury claims in 2006 accounted on average for £114 of every private comprehensive Motor premium, £217 for the average non-comprehensive policy. The difference is almost certainly explained by the type of people who choose non-comprehensive; they are much more likely to be young, to drive older cars and to be carrying passengers.
These statistics help to illustrate the obvious but absolutely vital point that, at the end of the day, the public pays for the cost of personal injury awards through the rising cost of their insurance. It is reasonable to speculate that this may lead one day to political pressure on government to reduce the generosity of our compensation system, but there is no sign of that happening any time soon.
We can expect the burden of personal injury claims met by the insurance industry to go on rising for the foreseeable future. Fortunately, this study demonstrates that it knows how to respond.
This article appeared in Post Magazine
