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Insurance
premium increases –
justified or not?
By John Cragg
The
most frequent insurance question that we receive now
is “Why are all my insurance Premiums going up
so much. It can’t all be because of September
11th.- can it?”.
Considering
the premium increases that have already been experienced
by some members and also reports that some companies
have been cutting back on insurance cover even to
the extent of functioning without the statutory employee’s
liability protection. This surely must be false economy
- accidents are going to happen, claims will occur,
but who can tell when or where and, particularly relevant,
for how much?
In
this two part article I will try and outline the many
recent changes which have all contributed to the insurers
costs and which can only be recouped by higher premium
charges.
GLOBAL
INDUSTRY
Considered
from a personal individual basis these increases may
be difficult to accept and certainly some uninformed
press comment has been rather unsympathetic towards
the insurance business.
Your personal insurance and your therapy (business)
insurance in particular is
however part of a global industry and not part of
some small independent sector within the insurance
world.
In recent months several articles have appeared in
the press giving notice of more expected premium increases.
Few have sought to explain the fact that there have
been very many different factors all working at the
same time and all adding to the costs of providing
insured protection for which the principle source
of funding is the Premium.
No article I have read has explained ALL the difficulties
with which the industry has been faced in recent years
Certainly September 11th. caused unprecedented losses
but it is not possible to argue that the attack on
the World Trade Centre was the sole cause of the industry’s
difficulty. Insurance companies were already being
challenged with increased costs arising from the effects
of new legislation, big increases in the numbers of
claims being made, additional compulsory levies and
a dozen or more other economic and commercial factors.
These include:–
Reforms
introduced by the Law Commission (2000)
Civil Justice reforms (the Woolf Report 1999)
Recovery of N.H.S. treatment charges (1999)
Huge losses caused by natural catastrophes of earthquake,
flood etc. (1998/1999/2000)
Personal Injury Claims Inflation
New types of claim including Stress
and other ‘new’ claims which rose by 40%
in 2001
Introduction of Conditional fee arrangements (No win
–no fee) legalised in 1995
These
and several other issues have added significantly
to the insurers costs of providing insurance protection.
SIGNIFICANT
IMPACT
I
will try and explain in simple terms each of these
factors to show that the premium increases that currently
affect all areas of insurance are not solely the result
of insurance companies using the events of September
11th. as an opportunity to increase profits. In this
issue I will deal mainly with changes in legislation
mainly within the last three years which have which
have a significant impact on insurance premiums. The
ongoing impact of changes in industrial levies, claims
frequency, the patterns of claims and the attitude
towards claiming and current economic factors will
be covered in a follow-up article in the next issue.
1.
Discount Rates for Settlement of Personal Injury Claims
Since 1999 it has been compulsory for the courts to
use actuarial tables of Life Expectancy when considering
personal injury claims. These tables are called the
Ogden Tables.
Because personal injury claims are settled in a lump
payment the claimants are able to invest the award
and obtain additional benefit by way of interest payments.
Insurers are therefore able to pay a lower settlement
figure to take into consideration the interest that
can be obtained
DIRECT
EFFECT
The
House of Lords fix the discounted rate which is based
on indexed linked Government stocks (which produce
a return much lower than equity investments).
The lower the rate of interest the lower is the benefit
received from the invested settlement by the claimant
and therefore the insurance company will need to make
a higher initial settlement.
The House of Lords originally set the discount rate
at 3.5% which was 1.5% less than the 4.5% that had
been used earlier. The discount rate was further lowered
in June 2001 to 2.5% and with interest rates continuing
to remain low or to fall even further a further reduction
cannot be ruled out. Each time the interest rate is
lowered the amount paid out in settlement of claims
will increase and this has a direct effect on the
premiums charged.
The impact of the 4.5% to 2.5% discount rate reduction
has resulted in about £900 million extra being
paid out in settling claims. This is equivalent to
an 8% increase in all premiums
2.
Conditional Fee Arrangements - (No Win – No Fee)
These arrangements have been legal in the UK only
since 1995 and have had a continuing and significant
influence on the number of claims that are made. The
fact that 95% of personal injury claims are successful
only adds to the pressure on the insurance companies.
INCREASING
CLAIMS COST
In
addition, since April 2000, lawyers have been allowed
to charge a ‘success fee’ if they win to
compensate for other cases that they may not win.
This fee can be up to 100% of the award and is recovered
from the insurers thus increasing claims costs.
New high profile companies have emerged to exploit
this new claims situation and need claims to fund
their own expenses which may include substantial advertising
costs.
The publicity for these claims have added significantly
to what is often referred to as the rising Compensation
Culture and has added substantially to the numbers
of claims received by the insurance companies, the
settlement payments they have had to make and the
financial provision they have to set aside in anticipation
of future claims.
3.
After The Event (ATE) Insurance
Claimants may take out (or be required to take out)
After The Event insurance to meet the claimants legal
costs if he loses. If he wins the premium can be recovered
from the insurer. The premiums are high sometimes
£1,500 which again add to the insurers costs.
The average effect on insurers costs in affected cases
has been an increase of 50%.
4.
Law Commission Reforms
The Law Commission has been reviewing the extent and
level of damages in personal injury claims (in which
category most claims by therapists fall). The Commission
recommended that for pain & suffering damages
should be increased by up to 100 %. However in February
2000 the Court of Appeal decided that no increases
were appropriate for awards up to £10,000 and
that the maximum increase should be one third. Nevertheless
the overall impact on premium rates has been calculated
at 2-3%.
The Commission also made recommendations in respect
of psychiatric illness and claims for wrongful death.
These are area in which a therapist’s insurance
is less likely to be involved with direct claims but
it will impact directly on their insurers costs and
therefore indirectly on therapist’s premium.
5.
Civil Justice Reforms – (The Woolf Report)
In 1999 the Civil claims procedures were radically
altered as a result of the report made by Lord Woolf.
Strict time limits for investigating and collecting
the information necessary for assessing claims were
imposed with severe financial penalties applied against
the insurers if they failed to comply with the new
regulations.
HEAVY
ADDITIONAL PENALTIES
These
changes have led to higher settlements as insurers
were forced to settle rather than contest claims thus
risking high costs and heavy additional penalties.
In affected cases this has resulted in a 5% increase
in claims costs. (These changes are one of the reasons
why you are asked to report immediately any incident
that might result in a claim being made)
6.
Abolition of Claims Agreements between Insurers
For many years Insurance companies had agreements
with Trade Unions’ solicitors resulting in consistent
settlements and a streamlined claims procedures. The
abolition of these agreements led to higher claims
and increased administration charges which in affected
cases led to an average claims increase of 25%
Noise and Vibration White Finger are the principle
causes of these claims and, in the case of VWF, as
many as 1.4million people may be affected. This large
number of potential claims has caused the insurers
to add significant sums to their reserves in order
to be able to meet claims in the future.
7.
Recovery of National Health Charges.
The N.H.S. has the right to recover the cost of treatment
given to those injured in motor vehicle accidents
from the insurers of those causing the accident. In
1999 the procedures were streamlined resulting in
a sharp increase in the money paid out by insurers.
SUBSTANTIAL
INCREASES
It
is possible that this ‘treatment cost recovery
principal’ may be extended to other fault based
injuries in the workplace which if it happens will
undoubtedly cause further substantial increases in
the costs having to be met by the insurance companies.
Each of these seven items have caused substantial
increases in the costs borne by insurance companies
during the last three years, costs which have to be
covered by increased premium charges. In the next
issue I will deal with a further eight changes which
have occurred during the same three year time scale
which have put even further pressure on insurance
companies and have contributed to the increasing premium
rates.
Since writing item 7 above, proposals have been announced
for the N.H.S. to recover treatment costs from ‘Accident
at work’ injuries where employers are judge to
have been at fault.
Acknowledgments.
I wish to acknowledge the Zurich insurance Co. as
the principle source of information given in this
article and also HSBC Insurance Brokers Ltd. for their
help in verifying the detail given in this article.
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