The French market and Motor Third Party Liability: 2011 analysis of serious bodily injury compensation

Transcription

1 Technical newsletter July 2012 The French market and Motor Third Party Liability: 2011 analysis of serious bodily injury compensation For a number of years, the compensation of serious bodily injury in France has given rise to extensive discussion, without leading to tangible reform. At the request of the Public Authorities, many legal practitioners and professors have contributed to the reflections of the working groups run by various VIPs. At the same time, several legislative proposals have been put forward, without the ratification of an official List of heads of damage, an up to date capitalisation scale for future damage, a compensation database or even frame of reference, or other crucial compensation tools. Completely independently of these issues, law n of 12 June 2003 has had a positive impact on the motor insurance market. The terms and conditions adopted, which aim to strengthen the campaign for road safety led to a reduction in the frequency of road accidents. Nevertheless, despite the lower number of victims, the global cost of compensation for insurers has remained unchanged, due to the increased cost and number of the most serious claims. In such a context, the absence of a legislative framework, and consequently the absence of tools to help to determine compensation levels, has contributed to a rise in the cost of the most serious bodily injury claims. These are mostly covered by reinsurance, particularly in excess of loss. We invite you to observe this rise based on the information in our possession. First of all, we will look at the evolution of the cost of claims in the light of the economic and legal situation over the past ten years. After this we will consider certain heads of damage compensated in 2009 and 2010.

2 The evolution of the cost of serious bodily injury claims faced with the realities of the economic and legal situation The information on amicable and compulsory settlements contained in the SCOR Global P&C database enables us to compare evolutions in the cost of claims to major economic indicators. Evolution of GDP and inflation compared to the average cost of a serious bodily injury claim where the level of injury is higher than 50%. Average Average cost of a serious bodily injury claim Evolution of inflation Evolution of GDP The increased cost of the annuities necessary to meet settlements is an initial factor. The weight of Permanent Functional Impairment, Loss of Future Earnings, Future Health Expenses and likely to be compensated by an annuity represents 78% of all settlements. For prudential reasons, all of these annuities must be funded in accordance with the French Insurance Code, on a maximum basis of 60% (2) of the average return on government bonds (TME-Taux Moyen d emprunt). The decrease in this rate is a contributing factor to a heavier claims burden, in the sense that the lower the accumulated capital is, the higher the technical reserves will be. Over the entire period in question to the cost of claims under general law has risen by a total of 134 points. In this same period, consumer price inflation has been limited to just 17 points. Nominal Gross Domestic Product (GDP) has increased by around 31 points. As we have already noted, there has been a shift in the scope of the principle of full compensation 1, independent of any wealth creation. Some people will justify this trend on the grounds that more compensation equals better compensation. This idea, however, is far from the general consensus, since we all remember the Credoc (Centre de Recherche pour l Étude et l Observation des Conditions de Vie) study of 2007, in which only 39% of severely handicapped victims believed that the compensation they had received had enabled them to rebuild their lives. We can identify at least two factors behind this rise in compensation: one relates to compensation techniques, and the other to the absence of a legal framework. Between December 2000 and December 2010, the average return on government bonds fell by 1.4 point, representing a variation of 46%. As a reminder, it fell from 3.3% to 1.9% in Let us take a simple example centred on the constitution of an annual life annuity of EUR 100,000, based on the French mortality table TD 88/90 and paid quarterly in arrears to three beneficiaries of different ages, in order to compare the cost of and variation in annuity capital over the past ten years. Impact of the variation in rates on the capital constituting an annual annuity of EUR 100,000. Age of annuity beneficiary Average yearly indexation (2) (rate: 3.3%) 2,503,100 2,015,300 1,307, (rate: 2.5%) 2,708,000 2,154,400 1,387, (rate: 2.1%) 2,918,800 2,278,800 1,437, (rate: 2.6%) 2,738,010 2,157,100 1,387, (rate: 1.9%) 3,088,000 2,375,900 1,475,700 VARIATION 23.37% 17.89% 12.89%

3 In view of these data, we should pay attention to any developments that could change annuity settlement policies in the future. From a legal point of view, attempts to construct a compensation law have been unsuccessful to date, despite a number of initiatives. Following the work conducted by Professor Catala s group in 2005, at the end of 2011 Professor Terré submitted a report with a view to revising the Third Party Liability system, and in particular the rules relating to bodily injury compensation. Lagging behind compared to the innovations of the Catala project, but taking account of the latest advances in jurisprudence, the proposed project includes a certain number of suggestions contained in various draft laws proposed over the past few years. One of the major new elements is the fact that the report incorporates special systems into the articles of the Civil Code, such as the Badinter law of 5 July For its part, the legislative overview remains unchanged, despite a number of draft or proposed laws: On 16 February 2010, the National Assembly unanimously voted in a law proposed by the Member of Parliament Guy Lefrand. It has yet to be approved by the Senate. On 9 July 2010, a law proposed by Laurent Beteille was recorded before the Senate. This proposal has not yet been debated. Finally, on 7 July 2011, the National Assembly voted in the law proposed by Senator Jean-Pierre Fourcade on the reform of Medical Malpractice. The articles of this text devoted to compensation facilities were sanctioned by a decision of the Constitutional Council on 4 August 2011, in accordance with the jurisprudence of the legislative rider. Consequently, we must wait for a new proposal before the DINTILHAC List is finally made official, a capitalisation scale for future damage is updated, or a compensation database or even frame of reference is created. Faced with this situation, actual practice has proved itself to be more efficient than legislation. Since 2004, specialist bodily injury reparation lawyers have combined their efforts within the French National Association of Bodily Injury Victim Lawyers, in order to share jurisprudence data on a nationwide scale and contribute to the doctrine in this field. Their unflagging involvement in a seminar organised by the Council of National Bars and Law Societies, and in specialist publications, has positioned them as leaders of opinion. To mitigate the jurisprudence disparities highlighted by the lawyers of victims, since December 2006 the magistrates of several Appeal Courts have decided to share their practices by publishing a Regional Indicative Frame of Reference for Bodily Injury Compensation. In November 2011, the fourth edition was published with this introduction: this frame of reference is not a scale, it simply provides methodological assistance and compensation benchmarks for practitioners confronted with bodily injury compensation. At the present time, twelve Courts of Appeal (Agen, Angers, Bordeaux, Grenoble, Limoges, Nîmes, Orléans, Pau, Poitiers, Toulouse, Versailles and Basse-Terre) have harmonised their medical expert reports, capitalisation scales and assessment of compensation for heads of damage, in accordance with the DINTILHAC classification. The ambition of these judges is to expand this guide to other jurisdictions. Legal practice has therefore contributed to the establishment of a compensation law, after having been heavily involved in the circulation of the DINTILHAC List as recommended by the Ministry of Justice 3. Even though the DINTILHAC List has still not been made official, its increasingly systematic use now justifies a study of each of the heads of damage it includes.

4 Breakdown of heads of damage compensated in 2009 and 2010 We will look at the heads of damage that we believe to be the most technically sensitive, due to their volatility. 1.14% 0.70% 4.68% 1.01% 2.21% Miscellaneous Costs The Costs and Expenses usually refunded remain stable from year to year, at just over 1%. This head has seen a very significant increase, which was already signalled in the 2011 Newsletter: The French market and Motor Third Party Liability: 2010 analysis of serious bodily injury compensation. Under the impact of the DINTILHAC List, human assistance costs before consolidation are currently settled under Miscellaneous Costs. Temporary represents 4.68% of total settlements. This new method of analysis currently seems to be thoroughly grounded in practice and should not evolve in the future. 1.01% 0.70% 2.21% 5.82% This head of damage remains the heaviest and the most sensitive to variations in the rate of capitalisation. Nevertheless, the settlement of this head via annuity payments remains the most suitable way in which to meet the future needs of the victim. According to this diagram, the volume of human assistance, post consolidation of injuries, remains higher than 50%, as we have observed since 2009 (4). However it should be noted that, at the present time, the total amount of human assistance pre and post consolidation represents 58% of total costs (Temporary : : 53.59). The partial recovery of autonomy supposedly promoted by these arrangements (2.21%) still does not reduce the cost of human assistance. Clearly, the principle of full compensation has its limits according to the analysis conducted by judges. Very often, jurisdictions have to settle human assistance needs independently of any necessary adaptations, i.e. in abstracto. Consequently, we can only lament the absence of a global needs analysis. This examination requires a global study of all the human and material means put into place. 0.70% 5.82% 1.01% 2.21% Current and Future Health Expenses Accumulated Current and Future Health Expenses represent, compared to 12.98% for the period 2008/2009 (5). It is interesting to observe that the cost of Future Health Expenses (7.51%) exceeds that of Current Health Expenses (6.72%). form of an annuity, Future Health Expenses are feeling the effects of a decrease in the average return on government bonds. Restricted by these budgetary measures, the weight of Current Health Expenses appears to be under control. 7.51% 6.72% This corresponds to a high level of victim medicalization, with victims benefitting from the most sophisticated and expensive medical techniques. Most often paid in the In a general sense, those two heads of damage remain likely to evolve, not just for economic reasons but also for health policy reasons. Loss of Current Earnings Permanent Functional Impairment Temporary Damage of Indirect Victims Loss of Future Earnings and Effect on professional Life Miscellaneous Costs Vehicle Modification Costs and Home Adaptation Costs Current and Future Health Expenses Current Health Expenses Non-Pecuniary Damage Future Health Expenses

5 0.70% 1.01% 5.82% 2.21% 2.02% Loss of Future Earnings and Effect on Professional Life The combined heads of damage Effect on Professional Life and Loss of Future Earnings represent, compared to 10.41% for the period (6). It is interesting to note how compensation is distributed for these two heads. For the most severe bodily injuries, the proportion devoted to Effect on Professional Life (2.02%) has been marginalised compared to compensation for Loss of Future Earnings (9.47%). The same cannot be said for less severe injuries, where each injury is seeing a significant increase in payments for Effect on Professional Life in the absence of Loss of Future Earnings, but we are not dealing with such claims in this newsletter. The head Loss of Future Earnings is affected by changes in the average return on government bonds, insofar as such claims are very often settled in the form of annuity payments. Nevertheless, this payment method strictly conforms to the principle of full compensation because, without the occurrence of an accident, the victim cannot claim in advance the equivalent of future earnings capacity in the form of capital. Moreover, we should remain vigilant regarding future developments in the content of this head of damage, in case the coverage of perks attached to fixed salary is widened or the effect on pensions is taken into account. The highly analytical trend developed by the judges could end in a broad notion of Loss of Future Earnings beyond what we are currently recording. 0.70% 1.01% 5.82% 2.21% Analysis of Permanent Functional Impairment The DINTILHAC List splits the damage caused to professional life from that caused to private life. This is how the definitions Effect on Professional Life and Loss of Future Earnings came about, as distinct from Permanent Functional Impairment. In the past, compensation for Permanent Partial Disability combined all of these ideas. At the present time, Permanent Functional Impairment is solely dedicated to the compensation of functional disability. Loss of Current Earnings Loss of Future Earnings and Effect on professional Life Damage of Indirect Victims Effect on Professional Life Vehicle Modification Costs and Home Adaptation Costs Current and Future Health Expenses Non-Pecuniary Damage Permanent Functional Impairment Miscellaneous Costs

6 Consequently, the share of compensation allocated to this head has decreased since 2006, the year in which the List was first implemented, which we illustrate in the graph below % 2001/ % 2006/ % 2007/ % 2008/ /2010 We measure a gap of 64% between the extreme values, and note unchanged values since This head represents of the total amount paid out in 2009/2010. Although the weight of compensation appears to have stabilised, we should still remain vigilant. A jurisprudence trend is emerging that favours the expansion of Permanent Functional Impairment, which would be likely to take a new concept into account: loss of quality of life. This new head of damage, supported by the lawyers of victims, appears to us to be subjective. It corresponds to the victim s perception of his loss of quality of life, due to the after effects of his injuries. It relies heavily on the victim and his expectations, both before and after the accident. In view of this, this head of damage seems to us to be uncertain. Conclusion This study once again illustrates the foreseeability issues with which we are faced due to the high level of legal uncertainty. We are still waiting for regulations that could provide transparency in terms of assessment and reinforce the equal treatment of litigants. Although the victim s rights are protected by the Badinter law, the assessment of damage to victims remains random, due to the absence of calculation tools that can fully satisfy the requirements of full Jean-Marc Houisse Head of Bodily Injury - EMEA jhouisse@scor.com compensation. The actions of legislators have blocked the implementation of an official list of heads of damage and up to date capitalisation scale, and the creation of a settlement database. During his speech on 11 January 2012, Jacques Degrandi, Head of the Paris Court of Appeal, reasserted to judges the need to construct a national indicative scale for the compensation of bodily injury, in order to control both the quantity and quality of legal disputes. At odds with this, the lawyers of victims support an extension of the List in order to demonstrate that it is impossible to confine compensation to a grid. As it stands, this confrontation is detrimental to the creation of a legal framework, which should be modernised in order to provide equal treatment between victims and reduce the uncertainty involved in this area. (1) Second civil division of the supreme court of appeal, 20 October (2) Article A of the French Insurance Code. (3) Circular dated 2 February (4) SCOR Newsletter 2009, 2010, (5) SCOR Newsletter (6) SCOR Newsletter SCOR Global P&C 5, avenue Kléber Paris Cedex 16 - France Editor: Dominique Dionnet Tel.: +33 (0) Fax: +33 (0) ddionnet@scor.com ISSN : No part of this publication may be reproduced in any form without the prior permission of the publisher. Design and conception: - (07/2012).