The 2012 report on third party motor claims and periodic payment orders (PPOs) from the Institute and Faculty of Actuaries

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1 The 2012 report on third party motor claims and periodic payment orders (PPOs) from the Institute and Faculty of Actuaries This is the third annual report from the Institute and Faculty of Actuaries collating and analysing data for UK third party motor claims and periodic payment orders of UK bodily injury claims (PPOs are inclusive of claims arising from motor, employers and public liability insurance) focusing on data for A full copy of the 120 page report is available on request. All supporting data for the key findings of the report can be found in the appendix. Page 1, key findings of the report Pages 3 & 4, UK claims maps Page 5, appendix 1 additional supporting data Page 11, appendix 2 supporting background information Key findings of the report Accidents giving rise to third party claims are on the decline according to our 2011 data. Our research suggests that the rise in petrol prices has contributed to a reduction in the number of hours people spend driving and therefore reduced accidents. Specifically third party damage claim frequencies have continued to decrease. This is the sharpest drop for the last 5 years, representing a decrease of 11%. However.., Third party bodily injury (TPI) claim frequencies increased by 5% in Claim numbers have been rising year on year since our records began, (with the exception of 2010 which appears to have been the result of Ministry of Justice personal injury claims reform rather than a change in trend). A staggering 18% increase in the proportion of third party accidents involving bodily injury (third party bodily injury/third party damage ratio) from 2010 to Since our records began year on year a greater proportion of accidents have involved a bodily injury claim, but this year has seen the greatest increase ever. We believe this rise goes with unprecedented activity by claims management companies. This change alone increased costs to insurers in excess of 400m and as a result it is likely that motor insurance premiums will rise. Hotspots of third party accidents with bodily injury claims were found - mostly in the North West and West Midlands, in particular Liverpool, Manchester and Birmingham. Previously 1

2 these hotspots were contained to city centres but our 2011 data shows they are now spreading out to more rural areas within these regions. One trend that did continue from 2010 is that the worst area of the UK for TPI claims, the North West, overtook the worst areas of the US in terms of the proportion of accidents involving a bodily injury claim There was a 9% increase in the average cost of small 1 third party bodily injury claims reported to insurers. Third party damage claim amounts increased by 12.5%, a significant rise from The data also points to a slowing down in third party property damage settlement rates. For the 3 rd year in a row PPO 2 awards that were settled in the UK motor insurance market totalled around the 70 mark, suggesting that a mercury level has been reached. There is evidence of stabilisation in the average PPO awards. The average age of PPO claimants increased only slightly from 34.4 years in 2010 to 35.2 years in Consistent with this increase, there was a slight decrease in future life expectancy in the 2011 data from the previous year reducing from 41.5 years to 40.4 years. The average size of an annual PPO payment in 2011 was 78,700 almost identical to the 2010 data. 1 Small bodily injury claims are capped at 50,000 for accidents in 1999 (inflation adjusted at 7% pa) to remove the distorting effect of very large claims 2 Periodic payment orders (PPOs) started to be used as a common means of settling the most severe bodily injury claims in The claims are typically larger than 1m in monetary value and involve settlement by periodic payments rather than the alternative single cash sums 2

3 Map of TPI Claims frequency in the UK in 2011 Map of third party injury claims frequency in the UK in 2011 (red represents high frequency) Jpeg image available on request 3

4 Map of TPI/TPD claim numbers ratio in the UK in 2011 and the locations of personal injury claim firms Map of third party injury/third party damages claim numbers ratio in the UK in 2011 (red represents high ratio) 2011 density of Claims Management Companies per head of population 4

5 Appendix 1: additional supporting data Abbreviations TPI third party injury TPD third party damage PPO periodic payment orders Changes in TPI and TPD frequency rates and regional UK analysis While the frequency of reported TPI claims during 2010 was relatively stable, 2011 showed a return to the trends of previous years, which saw annual average growth of 5.4% over the period The reasons behind this increase in 2011 remain unclear, but it may be a result of a final fling of claims management companies before a possible ban on referral fees. Additionally, 2010 may have been an anomalous year owing to the direct and indirect effects on the claims management process caused by the introduction of the Ministry of Justice personal injury claims reform. 5

6 In contrast, the frequency of reported TPD claims took a sharp dive of 11.2% in This is consistent with the movements observed in the last five years, albeit the most significant. One of the possible explanations is that this may have been caused by reduced vehicle usage due to higher petrol prices. (With reference to the UK Maps on page 4) The proportion of third party motor claims that involve an injury claim has been rising steadily since The 2010 increase was relatively modest. However, 2011 seems to have had both its own natural inflation and the missing inflation from 2010, which suggests that 2010 was a benign anomaly for the motor insurance industry. Scotland, with its different legal system, remained the region with the lowest proportion of third party bodily injury claims. Various postcode districts in Edinburgh, Aberdeen and Paisley were among the lowest in terms of the TPI/TPD ratio. Conversely, areas around Liverpool, Manchester and Birmingham were some of the highest. These areas were identified as hot spots in previous reports and they are continuing to expand each year. 6

7 Inde x 08H 1 08H 2 09H 1 09H 2 10H 1 10H 2 11H 1 11H 2 Experience in London has also deteriorated significantly since 2007, with new hot spots emerging in the east and further west of the city. US data from ISS's Private Passenger Fast Track Data reports revealed that the experience in States with the highest TPI/TPD ratios has improved slightly during the last year; for example, the range of ratios across the 6 worst US States has decreased from 33.4% % to 32.0% % during This is in sharp contrast to the UK where across different regions the TPI/TPD ratio has increased everywhere except Scotland, and lies between 15% and 43%, with a national average of 30%. Reported average cost of capped TPI claims 1.25 Index of Average Cost % annualised inflation Compared to 2010, the average cost of capped TPI reported claims (based on insurers estimates) has increased by 9% in This has led to a return to a 6% average annual rate, with 2010 being abnormally low and 2011 showing a catch up with two years inflation in one. Whether this continues may depend on the future of referral fees and the success of any ban. 7

8 The data also shows a speeding of both settlements and payments may be due to the Ministry of Justice personal injury claims reform. Average cost of TPD claims, settlement rates, case estimates The average cost of a reported TPD claim increased by 12.5% in Similar levels of inflation were last seen in 2006 and The average cost of the claims which were actually settled during 2011 has also increased, but by a lower amount. The data suggests that the claims settlement rate for 2011 has slowed down which may be due to: The fact that smaller claims are no longer being reported (which would typically have settled the quickest); Potential changes within insurers within the claims management procedures for claims that result in no payment by the insurer (nil claims); and Older claims settlement rates accelerating as claims staff managing damage claims have more capacity, due to fewer reported accidents. The data also suggests that insurers estimates of claim amounts have increased. Alternatively, this could be interpreted as evidence for slowing down of payments. PPO claims This report found that there were 70 individual PPO awards settled in the insurance market in of these were related to motor policies and 10 stemmed from liability claims. The trend of the last 3 years points to a plateau in PPO awards rather than a decline as reported elsewhere. This decline may have been influenced by including results from the Motor Insurance Bureau (MIB) who have seen a reduction in new PPO awards in 2011 since

9 PPO claims in the UK motor insurance market (excluding MIB) by year of settlement Number of PPOs Year Motor Liability This report also uncovered further evidence of the stabilisation of motor PPO awards from the nature of the settlements. The most recent data in the table below shows consistency across the board with last year s results. Since 2005 claimants, who have typically suffered life-altering injuries, have been awarded by the courts part of their settlement as an annual payment linked to an index of care costs published by the Office of National Statistics (ONS) in the Annual Survey of Hours and Earnings (ASHE). 9

10 Both the statistics relating to the number of PPO awards and the statistics in the table above illustrate that PPOs have the potential to become a significant part of some insurers liabilities in years to come as the number of PPOs in payment on the balance sheets of insurers increases over time. Notes on data The majority of data for this study was made available from the year The companies covered in our study represent 90% of the UK private motor comprehensive insurance market, as measured by the ABI reported Gross Earned Premiums for

11 Appendix 2: supporting background information Background to the Institute and Faculty of Actuaries Motor Third Party Working Party that helped to produce this report The Actuarial Profession has commissioned working parties since to investigate third party motor insurance claims as a result of some worrying inflationary trends being reported by individual insurers. The latest working party reported its initial findings, covering a restricted set of the 2011 data, at the both the general insurance pricing and reserving seminars in June This is being expanded in the work currently being undertaken, with results to be shared at the 2012 GIRO conference in September. These findings were based on data the working party collected from more than 90% of the UK private motor comprehensive market up to and including the year Background to the Institute and Faculty of Actuaries PPO Working Party that helped to produce this report The PPO Working Party of the Actuarial Profession began in the latter part of 2009 and first reported at GIRO It has continued to run since then, reporting annually at various actuarial events on PPO issues that affect pricing, reserving and capital in UK insurance and reinsurance. The working party's analysis represents the longest running and most up to date view of PPOs in the public domain. As well as surveying UK motor insurers, since 2011 it has included results from the MIB and is seeking to expand the survey to include more liability insurers than at present. Background to the Motor Insurance Industry Motor insurance offers cover to both personal and commercial customers in the UK and is compulsory in respect of third party property damage and third party bodily injury. This paper focuses on comprehensive cover for private car insurance only, and excludes the much smaller non-comprehensive market. According to the Office of Fair Trading, the costs of third party claims represent 70% of motor insurance claims costs - TPI accounts for 50% 11

12 and TPD for 20% - and so dominate the cost of insurance. According to ABI figures insurers collect in excess of 10 billion in motor premiums each year. The earned premiums for private car comprehensive insurance earned in 2011 were 9.5bn. The motor insurance industry lost money in both 2010 and 2011 (as per the FSA returns based on combined operating ratios). In 2011 there was a loss of over 6p for every 1 of premium sold 3. Insurance premiums increases have recently stalled. The Confused.com/Towers Watson Insurance Price Index shows private car market rate reductions of 2.3% for comprehensive policies during the 12 months to 30 March It is not unlikely that material future increases will be required before the UK private motor insurance market moves into profit. Ministry of Justice Personal Injury Claims Reform In April 2010 the Ministry of Justice introduced a new process for the handling of personal injury claims. These changes apply to all Road Traffic Accident personal injury claims worth between 1,000 and 10,000 occurring on or after 30 April 2010, which represents the majority of all bodily injury claims. The process has been drawn up to create quicker, simpler and cheaper access to compensation and includes fixed timetables to reduce both disputes and frivolous litigation. Ministry of Justice Proposal in September 2011 Banning Referral Fees In September 2011 the Ministry of Justice proposed that referral fees should be banned. The news was welcomed by the Actuarial Profession, due to the link between the recent rise in motor insurance premiums and the rise in the number of claims management companies. However, this proposal has not yet been passed into law, and there is currently no recognised definition of a referral fee. The Actuarial Profession also noted that there is 3 Deloittes 2012 Motor Report based on AM Best analysis of FSA returns 12

13 some way to go before insurance companies stop losing money on private motor insurance policies, and so premium increases are unlikely to be a thing of the past. Disclaimer: This paper represents the personal views of the working party members, who do not accept any liability for reliance on it and make no warranty as to its content or accuracy. This presentation supports the research effort of the Actuarial Profession s working party and is not written advice directed at the particular facts and circumstances of any given situation and/or data. 13