There is an old adage about insurance being the only product where you don’t know the cost of sales at the time of sale.
In essence, this is because insurance companies take on the liabilities of motorists, homeowners and business people to give them cover in the event of unfortunate events without knowing the full risk. Ultimately, the price of the product then reflects the claims environment, or put simply, the cost of the pay-out.
Insurance companies understandably want as much certainty as possible when they offer a product to an individual or a business. Unfortunately, with motor insurance in particular, the current climate is anything but certain.
While it is true to say motor insurance premiums fell in recent years to unsustainably low levels, to the point that they were lower than in the UK, this occurred even though our compensation is higher. This pricing strategy could not last forever and a correction was inevitable. However, this correction has come at a time of deep uncertainty driven by the rising cost of claims, rising cost of awards and the recent decision on who should carry the €90 million cost of the failure of Setanta Insurance.
Last November the Central Bank, which supervises the industry, published a review of bodily injury claims. Their report said “the upward trends in frequency and average cost of claims are clear” and outlined how there had been an increase in frequency of private motor injury claims from 2013 to 2014 with an average of 8.3 per cent.
Higher payouts
In addition, the average cost of claim was up approximately 8 per cent in private motor and approximately 27 per cent in public liability from 2012 to 2014. This means more claims and higher payouts; a routine whiplash case settles for €15,000 in Ireland, and €5,000 in the UK.
Of course, only a minority of such claims end up in court. For those that do, legal costs account for 60 per cent of compensation, according to the Injuries Board. This is especially costly as the average Circuit Court awards were up 14 per cent in 2014. Most claims are straightforward with no dispute over fault.
When faced with a similar climate of rising cost of claims a decade ago, the Injuries Board was set up to deal with non-contentious claims. This led to swifter settlement of claims and the removal of legal costs in lower value cases.
Despite its fine work, more than 90 per cent of claimants to the Injuries Board are now represented by solicitors even though it was meant to be a lawyer-free zone.
Rejection
In addition, about 40 per cent of Injuries Boards awards are rejected by claimants partly because of some having adopted a policy of non-co-operation, resulting in claimants not turning up for medicals or not providing loss of earnings information. Inevitably this means the Injuries Board cannot make an informed award which leads to rejection and expensive court action.
The key point is that the small number of claims adjudicated by the courts set a benchmark in terms of the value of an injury. In addition, it is a huge incentive for a claimant to pursue a claim to court with the hope of receiving a very large settlement.
A review of recent cases by Health and Safety Review magazine showed that the Court of Appeal had reduced certain awards by an average of 49 per cent, however, even these were higher by multiples of two to eight times the level of UK awards.
Carry the cost
Another variable introduced was the failure of Setanta, a Malta-registered company selling insurance in Ireland, with expected losses of €90 million. In a break with precedent, The Court of Appeal decided to make all other insurers liable for this loss by saying the Motor Insurers’ Bureau of Ireland (MIBI) should carry the cost over the Insurance Compensation Fund, set up to intervene in the event of insurance company insolvencies.
Up to that point, MIBI, which is funded by insurance companies, covered the costs of claims where a person was hit by an uninsured driver. This decision has far-reaching implications for all customers as insurers will have to price insurance to cover the potential losses of competitors.
This dangerous precedent distorts the market and adds further uncertainty.
As the price of insurance will reflect the claims environment there are immediate actions that could be taken to remove volatility around awards and costs.
Insurance Ireland has highlighted the need to reduce legal costs, to ensure that flaws in the Injuries Board process are tackled so that claimants must turn up for Injuries Board medicals and provide loss of earnings information. In addition, there is a need to impose consistent penalties for insurance fraud to act as a real deterrent and reduce the €50 cost to each premium.
Ultimately, we need to decide as a society what level of awards we want and what we can afford. Until we address these questions, there will continue to be uncertainty for insurers and customers. Kevin Thompson is chief executive of Insurance Ireland