Lung cancer_The Impact of Bodily Injury Claims on the UK Insurance and

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					                THE IMPACT OF BODILY INJURY CLAIMS

      ON THE UK INSURANCE AND REINSURANCE MARKET



                                      Pam Byrnes

                   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



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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

              inflation.

             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

              rehabilitation

             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


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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.




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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.




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          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

              contingencies.

          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


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              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

              reforms.

           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

ways; -

             Greater control over business portfolios

             More predictability in pricing and reserving

             Preventing difficult claims from spiralling out of control



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            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.




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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

larger.




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



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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

person.



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



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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

high.



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

reserved




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

industry.



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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