Claimant payouts skyrocket in latest blow for motor insurers

The number of costly periodic payment orders awarded to severely injured claimants has shot up over the past year, it is revealed in figures to be published shortly.

A report by the Actuarial Profession, which will be presented at its general insurance conference in a fortnight’s time, shows that 166 PPOs have been awarded against top motor insurers. This compares to a figure of 97 in the institute’s 2010 survey, which covers nine of the top 10 motor insurers. A further 21 PPOs have been awarded in liability cases. Of the PPO awards, 80 have a value of more than £5m, according to the AP.

These industry-wide figures are backed up by statistics recently presented by reinsurer General Re showing that it has received reports of 75 PPO cases with a value of more than £5m, of which 67% involve claimants with severe head injuries.

A paper issued alongside the presentation says: “We have seen a significant increase in the number of cases being settled by PPOs since 2008.”

PPOs work out as much more expensive than lump sum settlements if the injured individual has a normal life expectancy.

General Re calculates that insurers and reinsurers would have to increase their reserves by 20% per claim if the claimant lives for a minimum of 20 years and is awarded compensation via a PPO rather than a lump sum settlement. General Re based its calculation on an assessment of 57 settled PPOs.

This is very worrying. Non-life insurers are becoming more like life insurers’

Karl Murphy, EMB

The General Re briefing paper says: “The risks associated with PPOs will only add to the upward pressure on claims and it is clear to us that reinsurers will have to raise their prices in order to be paid adequately for assuming the increased volatility associated with such risks.”

Since 2005, courts have been able to award PPOs instead of lump sums in large bodily injury cases. Where awarded, PPOs replace the certainty of a lump sum with the uncertainty of an index-linked amount payable to a claimant annually for the rest of their lives, possibly 50 years or more.

Under PPOs individuals receive a payment, normally annually, which increases in line with a prescribed index. Since the landmark Thompstone v Tameside judgment in January 2008, this increase has been linked with wage inflation instead of price inflation, fuelling the swift rise in the volume of PPOs seen in the past three years.

With social care  facing acute staff shortages, General Re says it expects wages to increase faster in the care sector than in the economy as a whole.

Commenting on the increase in the number of PPOs, EMB head of non-life insurance Karl Murphy said: “This is very worrying. I am not convinced that insurers have really grasped the implications of this. Non-life insurers are becoming more like life insurers.”

♦ Justice secretary Ken Clarke has signalled that the government will make the payment and receipt of referral fees a criminal offence.

His Labour predecessor Jack Straw’s 10-minute rule motor insurance regulation bill, which he recently presented to parliament, includes a proposal that the payment or receipt of referral fees should become a criminal offence.

Straw asked Clarke in the House of Commons whether he accepted that “given the level of malpractice we see across the legal and paralegal industry, the ban will have to be backed by the criminal law”.

Responding to Straw’s question, Clarke said that the government was considering the way in which to enforce the ban, but added that it is “likely to be in the form recommended”.