THE IMPACT OF BODILY INJURY CLAIMS
ON THE UK INSURANCE AND REINSURANCE MARKET
Director Knowledge Management IUA
In the last decade bodily injury claims in industrialised countries have risen
dramatically. The reasons for this change is debatable, but it has often been
attributed to the litigious environment of the US and increasingly so in the UK.
The advancements in biomedical science means that life expectancy for
severely injured people has increased. However, the increase in personal injury
compensation awards is not solely due to the increase in life expectancy. Legal
changes accompanied by the growth of a compensation culture are also
considered to be driving factors. The impacts of the rise in claims costs, in the
main fall on the reinsurance industry, but there are economic costs that fall on
society. I shall be exploring how the current situation has developed in the UK
over the years and how the industry seeks to address the situation through the
claims management process. I will look at the impact of the Woolf reform and
the consultations by the Lord Chancellor’s department, including the
controversial Wells v Wells case regarding the discount rate level. I will also be
touching upon international comparisons with regards to claims management
and rehabilitation processes.
To gain a firmer understanding of this development and its likely cost
implications for the UK reinsurance industry, undertook significant research
which was published as The UK Bodily Injury Awards Study (LIRMA, 1997).
This study was the biggest ever-bodily injury study undertaken at that time in
the UK. It was based on an analysis of large personal injury claims over
£15,000. The quality of the data collected, which was predominately motor
claims, restricted the scope and range of methods that could be performed on
the data. This led to scepticism in some quarters of the conclusions of the
study. The conclusions of the study were, however, broadly in line with the
experience of the reinsurance practitioners
Bodily injury claims had been rising at an average of approximately
13% per annum over the previous decade, roughly twice the rate of
The factors driving claims included the rising cost of medical
treatment, legal changes, the growth in ‘compensation culture and
the UK’s approach to rehabilitation
The need for a market wide statistics bureau to enable better
compilation and use of statistics.
The industry should adopt a more proactive approach to
36% of all UK motor insurance premium income is consumed by
bodily injury claims.
To refer back to point two, the level of rehabilitation in the UK is an appalling
14%. In the US, an individual who has been seriously injured has about 32%
chance of returning to work. This figure is even higher in Scandinavia with up
to 50% of injured individuals returning to work. It is highly likely that by actively
addressing rehabilitation in a more efficient manner there may be cost savings
not only to the insurance industry but also for the UK as a whole.
Following the increased interest and developments surrounding UK Bodily
Injury Awards Study the IUA embarked on more research, in 1999, this time in
conjunction with the Association of British Insurers, ABI. The outcome of this
research as published in the Second Bodily Injury Study (IUA 1999). This study
is considered more robust in terms of data. The actuaries involved were able to
obtain 50% (700,000 claims) of the current markets personal injury claim data
with a full history of many claims going back several years. A range of different
methods were used to analysis and assess the degree of consistency in the
results. The conclusions of the Actuarial Working Party as follows: -
Over the years 1988-1997 the average increase in claims costs per
policy has been 11.5% whereas the national average earnings have
increased by 5.4%
From 1992-1997 the comparative increases are 11.7% and 3.3%.
1994-1997 the increases are 13.85 and 3.3%.
The years 1995-1997 have been affected by the result of the Ogden
judgement and the changes in NHS procedures.
In the period between 1992-1997 the claim frequency increased by
5.9%. in the size range £5,000 to £15,000 (An increase not noticed
by the insurance industry.)
The impact of personal injury legal advice advertising, has not yet
impacted the industry results.
The personal injury cost as a proportion of earned premiums has
risen to more than 36% from a rate of 23% in 1993.
A better understanding of claims trends will assist in discussions
with government but better management and understanding of the
issues is necessary.
Cost containment measures should be investigated.
The IUA study contains a number of illustrations and appendices, which detail
the results of the analysis undertaken by the Actuarial Working Party.
In the two years since the first study was undertaken, the extent and
significance of the legal changes were extraordinary. The House of Lords ruling
in Wells v Wells, the compensation recovery regime reforms, claw back of
medical expenses (Following road traffic accidents) and the methods of funding
litigation for claimants. Additionally the old civil procedures were replaced by
the Woolf reforms. The Legal Working Party’s looked at changes in the law and
the practice of assessment of damages, the main findings were: -
The Judicial Studies Board Guidelines had increased the valuations
of general damages, between 1996-1998 the suggested increases
for whiplash injuries and minor wrist injuries was 7.7%, for
quadriplegia and very severe brain damage 9.09%, paraplegia 8.3%
and above the knee amputation (one leg) 6.25%.
The assessment for loss of earnings can be based on a balance of
probability, the reality of business arrangements not the terms can
be used in an assessment and the implementation of the Disability
Act 1995 in respect of ‘disability discrimination.
Nursing care assessments now reflect the gratuitous nursing
services provided by a relative.
A 3% discount factor should be applied to accommodation costs.
Pension Claims assessment is not affected by any incapacity
benefit received by the claimant, as it was a form of insurance,
which resulted from the claimant’s foresight.
Aids and Adaptations assessments are still the subject of appeal.
Benefits received from the Mobility scheme in respect of transport
costs are now recoverable under the Compensation Recovery Unit
and therefore potentially deductible against damages.
The Social Security (Recovery of Benefits) Act 1997 can be applied
to all cases not settled by October 1997 so therefore can be
retrospective in application.
Changes in multipliers have had the biggest impact on damage
awards in the last two years. At the time of the report the multipliers
being assessed, by the Court of Appeal, was on the basis of a net
returns on investment of damages at 4%.
The rate of return was decided, based on the Index Linked
Government Stocks (ILGS) at3%.
Another blow to insurers was the decision that it was wrong to
discount the claimant’s life expectancy for unspecified
The courts appear to favour the application of the ‘prudent
estimates’ of future mortality as contained in the Ogden tables
rather than the English Life tables.
Provisional damages can be awarded if there is a possibility that the
claimant’s condition may deteriorate.
The cost of treatment for road traffic casualties is now recoverable
under the Road Traffic (NHS Charges) Act 1999. The government
expects to recoup £120/£160 m per annum as against £10/£20m
under the previous regime.
The standard rate of interest on general damages for pain, suffering
and loss of amenity fluctuates between 2% and 3%.
At present it is not possible to assess the impact of the changes to
litigation funding but indications are that they will increase the costs
of the insurance industry.
The Woolf reforms may benefit the insurance industry, but for all
parties there has been a steep learning curve. Pre issue and post
issue requirements, fixed costs, assessment of costs, case
management, part 36 offers, part 26 compliance, expert evidence,
disclosure, summery disposal, interlocutory applications, fees,
damages and the volume of litigation are all affected by the
Recent changes have resulted in a new culture of co-operation,
which may benefit society and the insurance industry.
A Statistics Working Party was also formed to look at the feasibility of creating a
database facility for the industry and interested parties. The WP formed the
opinion that such a facility should be commercially maintained and would assist
with the management of bodily injury risk and exposure. It would assist in
discussions with government but the creation of such a facility would be a
radical and robust solution to the problems the industry at present encountered.
The Rehabilitation Working Party used as its starting point the issues identified
in the original study. The success of rehabilitation in other industrialised areas
is considered to be due the case management culture and the rehabilitation
process being started shortly after an accident has occurred. The WP
developed. The Code of Best Practice on Rehabilitation in which insurers and
solicitors are asked to consider rehabilitation was developed by representatives
from the IUA, the ABI, Lloyd’s, The Loss Prevention Council (LPC), The
Association of Personal Injury Lawyers (APIL), The Forum of Insurance
Lawyers (FOIL) and the Bodily Claims Management Group. Active case
management of personal injuries would benefit the industry in the following
Greater control over business portfolios
More predictability in pricing and reserving
Preventing difficult claims from spiralling out of control
Use of rehabilitation would add value to the insurance product and
the industry could co-operate on research
Probable cost savings to the industry of 15% to 20%.
The code is currently still under review and is not to be considered as a
definitive document. There is some high profile cross market and industry
involvement in the review and PostMagazine are campaigning with the
‘Rehabilitation First’, which has seen an impressive cross section of insurance
and law professionals sign up to the initiative. So far several of the major
insurance organisations operating in the UK have stated their support for the
principle behind the code, including CGNU, AXA, Royal SunAlliance, and
Zurich Financial Services to name a few. The main point of the code is to
emphasis the importance of early intervention on treatment and rehabilitation in
personal injury cases. In intervening early the chances of the claimant
returning to employment are dramatically increased. This prevents the claimant
from becoming too disenfranchised with the illness as well as with the rest of
society. It shifts the focus from blame to possibilities which are very important
in encouraging the claimant to start on the way to getting a better life.
Ultimately most people do feel more of a sense of worth if they are active in
employment and able to actively partake in society. This is one important
objective with the code as it reduces the social costs to society as well as the
actual costs of care and medical treatment. The downside of not having any
rehabilitation included the increased costs to the economy as well as the strain
on the National Health Services once the lump sum payments becomes
depleted. Despite the increasingly large lump sum awards being given in cases
of personal injury research shows that most claimants have spent the entire
award with eight years. This means that additional unanticipated costs fall on
both the both the NHS and the DSS.
The courts award lump sum damages calculated by applying a multiplier to the
annual lost earnings or cost of care. Prior to 1998 these multipliers were based
on a discount rate of between 4% and 5% per annum. In 1998 the House Of
Lords ruled that a discount rate of 3% per annum was appropriate, a rate which
was based on the interest earnt from ILGS. Since the Civil Evidence Act 1995,
the Lord Chancellor has the power to prescribe a discount rate and can
overrule the House of Lords. In May 2000 the Lord Chancellor issued a
consultative document, ‘Damages- The Discount Rate and Alternatives to Lump
Sum Payments’, asking for responses from interested parties on a variety of
questions. This document implied that there was a possibility of introducing a
discount rate of 2% from 3%, such a move would mean that the an increase in
reserves for the motor insurance industry of £513m or a cost of 5.1% of earned
income, of which £399m represents the retrospective costs. For the liability
classes (Employers and public) would be £241m increase in reserves, a 32%
cost of earned premiums It can be seen that what might be considered to be
minor changes to the discount rate will have a large impact on the insurance
industry. Especially as these calculations are based on claims outstanding
rather then IBNR. Using IBNR the prospective figure would be considerably
As highlighted in the studies undertaken by the IUA studies the industry has
been subjected to a significant increase in both retrospective and prospective
claims costs over the last decade. Any increase in costs has to be funded by an
increase in insurance premiums to ensure that claims will be met and to protect
the interests of shareholders. The industry needs a stable legal environment
and certainty, to price insurance covers. Additionally other factors, which are
overlooked, is that, the industry has to cope with an increase in fraudulent
claims and an increase in non-insured drivers. For the latter all motor insurers
are levied annually to cover the cost of claims where an insured driver is
involved in an accident, but there is a correlation between the rise in premiums
and the number of un-insured drivers.
Further cost implications for insurers and reinsures operating in the personal
injury market is faced by the current conditions attached to the award structure
in place. Currently it is only possible to award a lump sum payment in the UK,
unless both the claimant and the defendant agree otherwise. This provides a
final payment, which can not be altered. If circumstances change, such as
advances in medical capabilities, it is accepted that the award may not
adequately consider the possibilities of remedial treatment of the injured
The Lord Chancellor’s document asked if there were alternative ways of
structuring awards would deal with such a scenario. The suggestions were, in
brief that the entire award was structured to provide an annuity, the award was
paid periodically, or a combination of lump sum payment with a periodic
payment for the medical costs. However, the industry feel that, although the
concept of structured settlements has considerable merit claimants should still
be able to elect this option rather than having it imposed upon them by courts or
insurers. As previously mentioned the problem of what kind of settlement to
award has become even more acute in recent years following a reduction in the
discount rate as well as a rise in the amount of damages awarded, awards in
the region of £2-3 million are not unusual these days. The insurance industry
need certainty, any introduction of periodic payments will mean that awards
could also be subject to review. The industry would not be able to remove the
claims from their books. Following advancements in medical science people
that have suffered severe injuries, such as paraplegics for example, have got
an increased life expectancy, which undoubtedly mean that a review of such
claims would consequently brings the claim awards to a higher level.
The insurance industry do not wish to see a regime of compulsory structured
settlements but neither do they wish for the imposition of a whereby the
claimant can periodically press for a revision of the original award. An
alternative may be a medical cost pool into which the medical costs portion of
awards is invested. Whilst this has been considered no research has been
undertaken, but the view is that the start up costs of such a venture would be
At the same time as the consultation document was issued by the Lord
Chancellor’s Department in the spring of 2000, the Clinical Disputes Forum was
investigating the possible alternatives to lump sum payments. They sought
views of possible ways of restructuring the claims and the impact of the
litigation process on the NHS.
The IUA submitted a response after having consulted with members on their
views. The main argument being that the low discount rate can not be
sustainable in the long term as well as highlighting the retrospective costs to the
industry. Certain changes could severely impact the solvency of Insurers and
Reinsurers as current policyholders do not take kindly to be required to cover
retroactive costs. The solvency of organisations could be severely troubled
given that reserving has been made on the basis of a certain discount rate and
if this is altered retroactively the costs will impact the solvency levels. This may
be increasingly important proposals of the increases to reserves for certain
business classes in the EC Solvency Directive. The EC is concerned about the
solvency of the industry and has proposed that there is a 50% increase in the
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reserves for companies underwriting liability business. It is not considered that
this requirement will cause the UK industry problems, as they are already well
As I am sure that you are aware reinsurance provides excess of loss protection
to insurers, which gives them indemnity for large awards in excess of agreed
thresholds. The gearing effect on claims costs could result in a considerable
financial burden for the reinsurance industry as for claims in excess of
£100,000 would cause a 15.2% prospective increase in reinsurance claims cost
and a 14.0% retrospective increase. Thus considering a discount rate of 2.0%,
instead of the 3.0% rate applied to a claim in excess of £500,000 the total cost
of earned premium will be 60.3%, 31.8% prospective and 28.5% retrospective.
Further complications arise with the Gilts, Index Linked Government Securities
(ILGS). These provide a virtually risk free investment, but do not produce a
good rate of return on capital. Since the controversial case of Wells v Wells it
has become clear that it is no longer prudent for a risk-adverse investor to
invest solely in ILGS. (However, although the discount rate in Wells was set at
3% there have been cases since then when the Judge has awarded interest at
2%). This is partly as the return on capital is less than favourable, partly as
there is doubt on the continued issuance of ILGS. Thus it would seem
inappropriate for the discount rate to be set to track the rate of return of the
ILGS. We would welcome a comprehensive review of the discount rate, to
establish what would be a suitable level as well as a workable practice for
reviews. This would be appropriate as a when economic circumstances require
it to be altered and for this alteration to be contained in legislation.
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As outlined there are a number of factors which are causing bodily injury claims
to rise in the UK. These problems are becoming further exacerbated
organisations such as Claims Direct who offer a no win, no fee claims
management. Recently insurers such as Independent Insurance and Ockham
Holdings have both blamed the growing compensation culture for their adverse
financial results. The uninsured loss recovery insurance area is developing
quickly; this is after the event insurance. It is worth noting that companies such
as Claims Direct require their customers to take out insurance to cover potential
legal costs, these fees are currently as high as £1,315. There is considerable
uncertainty in determining the premium for these policies and there is already
considerable litigation under way for disagreements regarding the recovery of
the solicitor’s success fee and the insurance premium by the solicitor’s clients in
those cases where a client has won. Estimates have shown that it is possible
that as many as 250,000 cases countrywide could be flooding the courts
regarding this issue. However, the Lord Chancellor has been persuaded that
solicitors should not be entitled to take a case on a conditional basis if the client
has traditional legal expenses cover.
The rise of the compensation cultures has often been linked to the
compensation climate in the US. However, most observers believe that it is
unlikely that the claims climate here will reach the same levels as that in the
US. A saving grace for the UK is that there are currently no provisions for the
awarding of punitive damages, which is the case in the US. In the US the
contingency fee structure allows for the lawyer to agree a fee which is a
percentage of any award granted. In the UK Access to Justice Act allows for the
lawyer to agree up to a 100% increase in fees if the action is successful, but
additionally it may be that the losing party has to the success fee as well as the
normal costs. Whilst claimants in the UK are now able to form class actions, at
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present there is no way of estimating the impact this will have on the insurance
Considering these sizeable costs to the insurance industry, society and the
affected individual, the UK Insurance Industry feels that there are good reasons
to consider rehabilitation as an addition to lump sum payments. For the injured
party the benefits of early rehabilitation could ensure a faster return to a more
normal life as well as reducing the danger of the condition worsening. For
insurers early rehabilitation should reduce the ultimate level of the claim as well
as easing the burden on the state for future care. It is imperative that the use of
rehabilitation in the UK is viewed not just as an issue of cost but more
importantly to give people a chance of leading a more fulfilling life as well as
improving their physical and mental wellbeing. Over the last few decades
breakthroughs in biomedical and technological sciences means that more
people are able to live longer and more fulfilling lives.
In December 1982 the UN defined rehabilitation as: “Rehabilitation means a
goal-directed and time limited process aimed at enabling an impaired person to
reach optimum mental, physical and/or social functional level, thus providing
her or him with the tools to change her or his own life.” Thus it is apparent that
this involves a purposeful, dynamic, interactive process and not one specific
activity. This would include both claimants solicitors, insurer’s claims managers
as well as medical staff, with insurers making providing the funds for
reasonable rehabilitation services.
Currently there are too few claimant solicitors and claims departments having a
broad understanding of the benefits of rehabilitation. It is important to consider
rehabilitation in lower value cases as well to increase the knowledge of its
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benefits for claimants, claims mangers, solicitors and society as a whole.
However, rehabilitation also carries significant costs to the industry, albeit it is
likely that in the long term this would not be as large as continuously increasing
lump sum damages awards. At a recent meeting in British Colombia, to use an
international example, the Bodily Injury Claims Managers Association, which is
effectively a government body, has agreed to provide $150,000 to fund
rehabilitation of each motor accident, regardless of fault. This scheme would
provide around 35 sessions of physio for each injured party, whereas in the UK
the normal number of sessions currently is six. A similar scheme could be
possible in the UK, and it is likely to have considerable impact on the level of
rehabilitation provided following personal injuries. Although if such a scheme
was to be established in the UK, the main part of the cost is likely to be born by
the industry rather then by a government body.
Rehabilitation issues will also have to be considered in the context of
government provided health care. It will become increasingly difficult for the
under funded NHS to provide sufficient care to long-term disabled patients,
such as paraplegic. Moreover, recent decisions by the government to pay only
for care delivered by nurses in nursing homes rather than by charities or a care
assistant. Although this will only have a marginal effect on long term care
insurance it is likely to impact the individual concerned a greater deal. Although
the NHS plan talks about early intervention and rehabilitation as cornerstones
of intermediate care thus bringing it higher on the agenda.
Internationally as mentioned previously the record of rehabilitation varies
considerably. In Scandinavia for example a history of high taxation and a high
level of public service is delivered with reasonable success to a comparatively
small population. Whereas larger countries such as France and Germany
provide a basic safety net for those who can not be financed or looked after by
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their family. In the US rehabilitation is high on the agenda with federal
rehabilitation research programs putting giving the issue the attention it requires
with Congress recognising the opportunities for improving peoples’ lives.
Research undertaken under the NIDRR plan have increased the life expectancy
for people with spinal cord injuries with a reduction in the associated
complications these illnesses carry with them. (Such as renal failure and
decubitus ulcers.) Moreover, this project attempts to highlight some important
issues regarding the interplay between person and environment with adaptive
processes required by both society and the individual. Over the coming
decades we are likely to see an ageing disabled population which brings the
focus of the research required to consider quality of life issues over the lifespan.
These changes in longevity are likely to affect the insurance and reinsurance
industry not only through increases in the size of awards but also in the
increasing need for long term cover for people with disabilities thus affecting the
life insurance industry.
Whilst this paper has concentrated on the impact of rising claim awards to the
insurance industry, it must be remembered that the Industrial Injuries
Compensation Scheme and the NHS are also severely affected. There is a
view that Industrial Injuries Compensation scheme will move to the private
sector, Employers liability insurance being an acceptable alternative to the
present system. Some research has been undertaken but not as far as I am
aware in conjunction with the findings in the IU Bodily Injury Study.
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