Technical newsletter June 2013 Motor Third Party Liability: Analysis of Serious Bodily Injury compensation from a European perspective For a number of years, the compensation for serious bodily injury in the French market has been the subject of in-depth consideration, with a view to promoting the emergence of a bona fide law devoted to this topic. This desire is also a key concern for European authorities, in their quest for harmonisation. Thus, with respect to the application of criminal matters, a debate has begun in the wake of a European directive dated 25 October 2012, which aims to strengthen and harmonise the rights of victims. In his speech given at the 2013 formal opening of the Paris Court of Appeal, the President of the Court raised the idea of changing the French criminal proceedings system to be more like the English model, where the victim is not a party in the trial, but simply a witness. In this system, victims of criminal offences are obliged to go through the civil courts in order to obtain compensation for any serious bodily injury they have suffered. As civil proceedings cannot begin until the criminal proceedings have concluded, a reform like this would require an acceleration of the procedures involved. In the absence of such reform, France would be exposed to an increasing amount of censure from the European Court of Human Rights for breaching the right to trial within a reasonable timeframe, as part of the right to a fair trial. Similarly, in connection with civil claims, the Institute for European Traffic Law made a recommendation in February 2013 with a view to creating a right to full compensation for the children of road traffic accident victims, and generally speaking for all victims deemed to be vulnerable, such as elderly and disabled people. In order to take this context into account, we have decided to give a European slant to this paper, while analysing the main trends observed in the French market, based on our statistical database of settled claims. With regard to the French market, we will compare developments in the volume of claims under common law with macroeconomic indicators, and we will present a more detailed analysis of the evolution of certain heads of. Finally, we will look at current issues in neighbouring European markets.
Evolution of the cost of serious bodily injury claims faced with the realities of the economic and legal situation Evolution of GDP, inflation and the average return on government bonds compared to the average cost of a serious bodily injury claim where the level of injury is higher than 50%. Average 300 260 250 200 150 100 50 0 100 2001 117 2002 143 136 2003 2004 156 2005 171 174 2006 2007 193 2008 213 2009 234 2010 2011 Average cost of a serious bodily injury claim Evolution of inflation Evolution of GDP Evolution of average return on government bonds Source: SCOR Global P&C Between 2001 and 2011, the cost of compensation payments rose by 160 points. Out-of-court settlements and definitive legal rulings have all respected the full compensation principle: the, the whole and nothing but the. Over this same period, the economic indicators show a rise in inflation of just 19 points, and of 35 points for nominal Gross Domestic Product (GDP). This volatility can only lead to a sense of inequality among victims, and a lack of foreseeability for insurers. Similarly, with regard to the methods used to calculate technical reserves for future, which represent a major share of total compensation costs, we note that the evolution of the average return on government bonds (TME Taux Moyen d Emprunt d Etat) is not necessarily connected to that of the average cost of compensation for the most serious bodily personal injuries. We notice a 26 point increase in the cost of serious bodily injuries in 2011 compared to 2010, whereas the average return on government bonds has varied by just 4 points. This is due to new clauses in the decree of 23 December 2010, which uses the evolution of these rates over the past 24 months as its calculation basis. While the evolution of the return on government bonds causes fluctuations, we feel that there are also other factors involved. Judges have freely exercised their discretion against the backdrop of increasingly large compensation demands, creating disparities in how appeal courts deal with such claims, both in terms of time and, of course, in terms of the different approaches adopted by courts. Conscious of this situation, certain courts have harmonised their rules in order to construct a common benchmark. Overall, this approach has not changed the inflationist trend, since the highest values have been retained as new courts have progressively been incorporated into this common facility. It remains for us to hope for the finalisation of a national benchmark designed to lessen volatility and to provide greater foreseeability for all stakeholders, along with equal treatment for victims. For the time being, we will analyse certain key heads of in more detail, using our database of claims that have been settled on the French market. Different situations on different markets In Italy, a common jurisprudential benchmark has progressively been implemented in the absence of a law. After several rulings handed down by the Italian Supreme Court, all jurisdictions have begun to follow the benchmark developed by the court of Milan. The passing of a law, designed to establish a common standard, is still pending. In Spain, a compensation scale was implemented on a national level in 1995. Before this, Spain encountered the same problems that France is seeing today: a surge in the overall cost of compensation for serious bodily injury, and the unequal treatment of victims faced with the diversity of the compensation criteria used by Spanish jurisdictions. The Baremo has brought foreseeability and has led to greater equality in terms of the assessment of serious bodily injury. In Belgium, an indicative table appeared in 1994, as the result of a compromise between judges and insurers, and in the absence of any parliamentary initiative. It is updated regularly. 2 - SCOR Global P&C - Technical newsletter
Breakdown of heads of compensated in 2010-2011 Personal Care Personal Care 0.95% 9.36% Generally speaking, we can see that personal assistance at home is still the preferred choice over being placed in a care institution. In a context of continued increases in the cost of serious bodily injury claims, Personal Care represented almost 54% of overall compensation costs. We note an increase in hourly costs. In this respect, the Court of Appeal has firmly reiterated that compensation for Personal Care will not be reduced if the victim is cared for by a family member 1, and continues to reject the application of different hourly rates for care provided by family members and care provided by professionals 2. The number of care hours allocated to victims continues to rise, including cumulatively beyond 24 hours per day for the gravest situations. Sometimes, because the number of care hours agreed upon and the corresponding costs are not indicated at the time of settlement, it becomes extremely difficult in later years to justify what had originally been agreed upon in good faith. In this regard, we can only recommend that the calculations used to determine compensation be set out in detail when the transaction protocols are drawn up as part of any out-of-court agreement. A tool to calculate Personal Care needs would most definitely enable those involved to avoid disputes if the victim asks for the file to be re-opened in the future due to the deterioration of his or her condition. 1 Second Civil Division of the Supreme Court of Appeal, 4 October 2012, n 11-24.789 2 Second Civil Division of the Supreme Court of Appeal, 22 November 2012, n 11-25494 A different situation 0.95% Home and Vehicle Adaptation Costs In Switzerland, the Personal Care head of goes hand in hand with the concept of Loss of Household Capacity, which means the inability to carry out domestic household duties at home. This head of is assessed using standardised tests, designed to determine what the victim is still capable of doing. The results of these tests are then confirmed by a visit to the victim at home. 9.36% Miscellaneous Costs 0.82% T.P.C. 0.95% 3.65% 9.36% Home and Vehicle Adaptation Costs The cost of adapting homes and vehicles represented 2.7% of the total cost of serious bodily injury compensation in 2010-2011. We observe an increase in this head of of around 21% since our last study published in July 2012. Once again, we notice that the benefits provided by technical assistance and Miscellaneous Costs Excluding Temporary Personal Care, Miscellaneous Costs only represented 0.8% of the total cost of serious bodily injury compensation in 2010-2011, compared to 1.1% in 2009-2010. They remain virtually stable compared to previous years. Nevertheless, taking account of the impact of the DINTHILAC List, we note that this adaptations have not reduced the proportion of costs devoted to personal assistance. Very often, we note that settlement of this head occurs following the medical expert report which determines personal care needs. In the absence of a global analysis, the full compensation principle is not respected. head of now includes a larger share of costs for personal assistance up until the consolidation of injuries. Temporary Personal Care represents more than 80% of total Miscellaneous Costs. The impact of the List seems to be firmly rooted in our legal environment. Loss of Current Earnings Damage to Indirect Victims Home Adaptation Costs and Vehicle Modification Costs Non-pecuniary Damage Permanent Functional Impairment Loss of Future Earnings and Effect on Professional Life Current and Future Health Expenses Personal Care Temporary Personal Care Miscellaneous Costs SCOR Global P&C - Technical newsletter - 3
0.95% 19.36% Current Health Expenses 7.69% Future Health Expenses 8.72% Current and Future Health Expenses There was an increase in Health Expenses in 2010-2011. This increase is relatively balanced between Current health Expenses and Future Health Expenses, as illustrated in the table below: 2009-2010 Variation 2010-2011 Current and Future Health Expense 14.23% +15.32% Current Health Expenses 6.72% +14.43% 7.69% Future Health Expenses 7.51% +16.11% 8.72% It is interesting to note this trend at the same time as we are observing a national slowdown in the growth of day to day health, which has been taking place since 2007. In fact, the Health Accounts published in 2011 by the Directorate for Research, Studies, Evaluation and Statistics (Direction de la recherche, des études, de l évaluation et des statistiques DREES) show an increase of just 2.7% between 2010 and 2011, compared to an increase of 4.3% between 2006 and 2007. Despite the budgetary constraints weighing on the day to day operations of hospitals, seriously injured victims definitely receive better support. Loss of Future Earnings and Effect on Professional Life 0.95% Loss of Future Earnings 9% Effect on Professional Life 0.36% The share of Effect on Professional Life is very low compared to that of Loss of Future Earnings. In the most serious cases, judges and adjusters are increasingly abandoning the fixed sum compensation enabled by the Effect on Professional Life head of in favour of compensation for Loss of Future Earnings, calculated mathematically. The latter could, moreover, increase if compensation for this head of in the form of an annuity were to become common practice. This is not yet the case, since we observe from our settlement database that compensation for Loss of Future Earnings is settled in the form of an annuity in less than 30% of cases, and in capital in more than 70% of cases. Moreover, there remains the problem of taking wage supplements into account, which could give rise to a legal dispute in the future. A different situation In Austria, as in Switzerland and Germany, the socio-professional rehabilitation of victims is an integral part of the compensation of. This may take place in a number of different ways, whether by adapting the job conducted by the victim, or by offering the victim training that would enable him or her to do a job more suited to his or her disability. The obligation to implement these professional rehabilitation measures generally rests with the social security bodies. Loss of Current Earnings Permanent Functional Impairment Personal Care Future Health Expenses Damage to Indirect Victims Loss of Future Earnings Temporary Personal Care Home Adaptation Costs and Vehicle Modification Costs Effect on Professional Life Miscellaneous Costs Non-pecuniary Damage Current and Future Health Expenses Current Health Expenses Source: SCOR Global P&C 4 - SCOR Global P&C - Technical newsletter
0.95% Permanent Functional Impairment 9.36% Permanent Functional Impairment In a context of increasing compensation costs, the share devoted to Permanent Functional Impairment remained virtually unchanged between 2008 and 2011. As illustrated in the graph below, it appears that we have definitely reached a plateau. 20.60% 11.40% 9.75% 7.68% 7.48% 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 Having analysed the compensation costs for victims of the most severe bodily injuries recorded in the French market, we will now compare these costs with those of eight other economically comparable countries in Europe. Different levels of compensation on different markets For the purposes of comparison, we will use the example of a 30 year-old quadriplegic man earning the average income in each country before his accident. Compensation for head trauma and paraplegia is too volatile and remains too sensitive to the seriousness of after effects and to whether or not the victim is able to find a job. The cost of compensation in the Netherlands, which is the lowest of the nine countries looked at here, constitutes the 100 index. 30 year-old man with quadriplegic injuries (2010-2011 Database) 1000 900 800 700 600 500 400 300 200 100 0 Netherlands Spain Italy Belgium Austria Switzerland Germany France UK In this graph, which shows compensation by country in ascending order, we note a major disparity in compensation levels. It would appear that harmonisation in terms of serious bodily injury compensation has a long way to go, notably due to different legal systems. For example, welfare bodies have little or no recourse against the insurer that compensates the victim in those countries where the cost of compensation is lowest, such as the Netherlands or Spain. In Austria, Switzerland and Germany, the management of professional rehabilitation by welfare bodies reduces the cost of Loss of Future Earnings. As for the UK, it should be noted that the overall cost burden is made heavier by the taking into account of all legal fees, and more specifically the practice in the UK that the defendant (or his insurers) will pay the successful claimant s legal costs of bringing a claim for s. In this market, the development of annuity settlements is also increasing costs for insurers. SCOR Global P&C - Technical newsletter - 5
Annuity settlements, moreover, constitute another illustration of the disparities between different markets. Not all countries have adopted this system, as the table below shows: Payment methods per head of in European markets in 2013 Germany Austria Belgium Spain France Italy The Netherlands United Kingdom Switzerland 3 Payment via capital - Pain and suffering 4 - Medical treatment (hospital and ambulatory care) 5 - Care costs 4 - Increased needs like adaptation of apartment/ house and vehicle - Pain and suffering - Medical treatment (hospital and ambulatory care) - Increased needs like adaptation of apartment/ house and vehicle household capacity (including loss of ) - Health - Health - Miscellaneous Costs - Home adaptation costs and vehicle modification costs - Temporary and permanent Functional impairment ( Danno Biologico ) - Legal/expert - Health (including loss of ) - Medical (including loss of ) - Medical Non-pecuniary - Medical costs (hospital/ ambulatory care also prosthesis) + loss of pension household capacity Payment via annuities (very rarely) - Future Health future (occasionally) - Care - Case Management (occasionally) 3 In Switzerland, annuities are possible but very rare. Usually indemnities are paid via capital or via on-going payments (running costs are paid for example for medical costs or care). 4 In most cases pain and suffering is paid as a lump sum. Based on Supreme Court judgments it is also possible to combine lump sums with annuities (without increasing the overall compensation for pain and suffering). Anyhow, such cases are rare and presume most serious injuries of the victim and his explicit demand for an annuity. 5 General legal rule is to pay annuities, 843 BGB. Anyhow, in most cases the parties involved agree on a lump sum, particularly for the loss of. Typical development of a claim is to pay the loss of in concreto for a period between 3-8 years (until the health situation of the victim is sufficiently clear) and then to agree on a lump sum for the future loss of. In principal, for care costs (third party assistance costs for an institution) the situation is the same, but definite settlements are getting less regular in most series cases. Due to the financial crises and the low interest rate environment changes of practice towards a more frequent application of annuities are possible. Approximately 80-90% of claims with seriously injured victims are settled definitely within a period of 10-12 years; in 10 to 20 % of claims parties do not agree on a definite settlement with the consequence that annuities are to be paid. This method of settlement is widely used in France, and is starting to develop in the UK. It remains marginal in the other markets, although it presents an undeniable advantage for victims in a period of economic uncertainty: the recipient of the compensation does not have to bear the risk relating to the investment return on lump sum s. Faced with these disparities, the main concerns in terms of bodily injury compensation are necessarily different from market to market. 6 - SCOR Global P&C - Technical newsletter
Different perspectives on the current problems involved in compensation in Europe Hans-Ulrick Finck (Cologne): In Germany, no right to compensation for the pain and suffering caused to the loved ones of a victim killed in a road accident is recognised, save in a few exceptional cases. Nevertheless, the Bavarian Justice Minister initiated a bill in 2012 designed to compensate the pain and suffering of the spouses, partners, parents or children of victims who have died following a road accident. The implementation of this bill could lead to an increase in compensation costs of around EUR 900 million for insurers, when compensation costs in Germany are already among the highest in Europe. An increase in premiums would then be likely. Although this bill is currently suspended, the discussion remains open, notably with regard to the extension of compensation for pain and suffering to the loved ones of the most seriously injured victims. Beate Quast (Zurich): In Austria, the social security bodies have been obliged to provide professional rehabilitation services to accident victims since 1956. The victim must contact the mandatory accident insurance body, the pensions insurance body or the Federal Office of Welfare Insurance. Despite the current economic climate, the State is continuing with these socio-professional rehabilitation programmes, thereby enabling victims to return to a socially integrated life. Isabelle Tanre (Paris): In Belgium, the sixth version of the indicative table implemented in 1994 was published at the end of 2012. This new scale was drawn up by a commission exclusively composed of judges, as a non-binding tool, to support judges in the assessment of s. The commission launched a new expert report designed to obtain a more specific description of injuries, in order to facilitate fairer compensation. The implementation of this new scale has led to a reduction in the cost of cases in which victims have a disability rate of less than 6%, but to an increase in the heaviest costs, notably due to the change in discount rates. Similarly, the increase in the number of appeals to the agency for disabled people (VAPH - Vlaams Agentschap voor Personen met een Handicap) for the reimbursement of care institution fees has played a role in the rise in costs. José Marquez Ruiz (Madrid): In Spain, a reform of the national scale is expected for this year, with a view to following current economic developments as closely as possible. It will concentrate on the compensation of the future needs of serious bodily injury victims, particularly head trauma victims. The assessment of Loss of Future Earnings could also be modified, based on the Ogden Tables model used in the UK. All stakeholders agree on the principle of reforming the national scale. For this reason, the General Directorate of Insurance and Pension Funds (DGSFP) has decided to bring forward the submission date of the report of a committee of experts on the modification of the current assessment system, to July 2013. François Blanchet (Paris): In France, two recent issues have had and will continue to have an inflationary impact on the claims burden: For accidents since 1 January 2012, the re-evaluation of compensation annuities paid following a road accident has been transferred to insurers, replacing a dedicated Fund. Following an initial decree dated 27 December 2011, which has since been updated by a decree dated 29 January 2013, a new capitalisation table has been officially implemented to calculate how much social bodies will owe for future services. This consists of a Male/Female rate table for 2000-2002 and a fixed rate of 2.97% for 2013. Stefano Lassa (Milan): In Italy, the minimum coverage for Third Party motor liability is now limited to EUR 5 million per event for bodily injury and EUR 1 million for property following the 5 th European Motor Directive. The compensation of non-pecuniary to victims with a disability rate of less than 9% is governed by a law that determines the price of the disability percentage each year. The system is generally well controlled, even though a very limited level of flexibility granted to the judges means that there are slight variations in the amounts ultimately granted. For victims with a disability rate higher than 9%, compensation for non-pecuniary is always determined at the discretion of the judges. A law was adopted in November 2012 with regard to medical Third Party liability. This now imposes mandatory insurance on all doctors, and changes the burden of proof: if a doctor in a bodily injury case can prove that he/she has respected the code of good practice implemented by the hospital, the burden of proof for the causal link rests with the victim. This reform is likely to modify the current caseload. Pascal Cornet (Paris): In the Netherlands, coverage in terms of mandatory Motor Third Party Liability is fixed at the minimum levels of the 5th European Motor Directive, i.e. EUR 5.6 million for bodily injury after indexation with the consumer price index. The law on compensation for bodily injury has not undergone any significant changes recently. The amount of compensation allocated remains relatively stable. Those involved in the field of bodily injury compensation have stuck to a charter of good conduct in terms of claims management, adhering to the principle of rapid management and favouring amicable settlements. Finally, in a country where the State social security bodies cover a large share of without bringing claims directly against the third party at fault, the bill designed to reduce the services provided, which notably concerns the law on exceptional medical covering care and carer costs (ABWZ), raises the risk that the third party at fault s insurer will pay the costs of the victim. Stuart Lomax (London): In the United Kingdom, the issue of how compensation is paid to serious injury victims is a key concern for insurers and reinsurers. SCOR Global P&C - Technical newsletter - 7
In 2003, while insurers favoured lump-sum settlements, the law allowed judges to impose annuity-based settlements (Periodical Payment Orders). However, this method of settlement has developed chiefly since the ruling on the Thompstone v. Tameside appeal handed down in 2008, and uses a new indexation method different to the method set out in the law of 2003. The discount rate, which has been fixed at 2.5% since 2001, has been heavily criticised by victim associations. These associations consider that, given the financial crisis, this rate is too high to fully satisfy the principle of full reparation. In this context, the Ministry of Justice has decided to consult the market, notably on the method of fixing the capitalisation rate and its application, and on the issue of whether or not the preference for annuity settlements is likely to continue. Viviane Le Dantec-Fuhrmann (Zurich): In Switzerland, the idea of Loss of Household Capacity is the subject of considerable debate. It was at the centre of discussions during the Bodily Injury Compensation Forum organised in January 2013. The assessment of this head of involves determining the household activity that the victim would have carried out if he/ she had not been injured. This is made possible thanks to the ESPA (Enquête Suisse sur la Population Active Swiss Active Population Survey) tables, which were updated in 2010 and combine the household activity statistics from a sample of 25,000 inhabitants. Loss of Household Capacity represents around 20% of the total cost of compensation for victims of serious bodily injury. Very often, personal assistance is also compensated in addition to this head of. It should be noted that the higher the amount of personal assistance, the more the Loss of Household Capacity head of is likely to be reduced or even cancelled out, since the household activity will be carried out by a third party. Conclusion We have tried to analyse the compensation of serious bodily injury in 2010-2011 in France in light of the current situation observed in neighbouring countries. There are common concerns such as the assessment of personal assistance, the existence and update of compensation benchmarks, and the revaluation of capitalisation tables. Ideally, a Europe-wide harmonisation of bodily injury compensation law should adopt the best rules for assessment and compensation from the different European countries. To this end, we should implement a unified method for medical assessment and the calculation of compensation. Similarly, it should become normal practice to assist and support the victim in terms of socio-professional rehabilitation. The fate of victims and (re)insurers is closely linked. We owe it to ourselves to find rules that provide greater efficiency for all concerned. Jean-Marc Houisse jhouisse@scor.com Hans-Ulrick Finck hfinck@scor.com Beate Quast bquast@scor.com Isabelle Tanré itanre@scor.com José Marquez Ruiz jmarquez@scor.com François Blanchet fblanchet@scor.com Stefano Lassa slassa@scor.com Pascal Cornet pcornet@scor.com Viviane Le Dantec-Fuhrmann vledantec@scor.com Stuart Lomax Pauline Demarez SCOR Global P&C 5, avenue Kléber - 75795 Paris Cedex 16 - France Editor: Dominique Dionnet Tel.: +33 (0)1 58 44 72 62 - Fax: +33 (0)1 58 44 85 22 - ddionnet@scor.com ISSN: 1967-2136 No part of this publication may be reproduced in any form without the prior permission of the publisher. Design and conception: - (06/2013).