Spanish Motor Insurers Gear Up for Changes to Personal Injury Table
The Baremo system has provided a legal framework and a stable basis for compensation for personal injury claims over the last 20 years, meaning that out-of-court settlements are the standard in Spain, even for severe bodily injury claims. It’s effectively removed a lot of the uncertainty from this important line of business for insurers.
The Spanish motor insurance sector has been enjoying excellent results over this period. Profits have held up in the last decade, in the face of increasing competition from direct insurance companies and online price comparison websites, not to mention the sharp decline in car sales since the 2008 financial crisis started.
Average premium rates have declined as a result, but on the other hand two of Spain’s market leaders (Allianz and Mapfre) recently announced plans to increase their motor tariffs, potentially signaling a rate correction.
Against this background, what effect will the Baremo modification - due to take effect January 1, 2016 - have on the market?
According to the Ministry of Justice, using data from TIREA (Tecnologías de la Información y Redes para les Entidades Aseguradoras) in cooperation with the Spanish insurance association (UNESPA), the burden of losses on insurers could increase by 15%-16.2% for motor third-party losses with bodily injury victims, as a result of the changes.
There’s also uncertainty around the likely effect of new claims areas that until now haven’t played a role in determining compensation amounts; for example, loss of income and the addition of new claimants, such as close friends who will now have the right to indemnification.
It is thought that litigation is likely to increase noticeably during the initial phase of the new Baremo table, inevitably resulting in higher loss costs.
In addition the increase in compensation for severe bodily injuries could add to reinsurance costs, especially excess of loss treaty rates, because of an exponential increase of compensation amounts for severe bodily injury cases.
However, uncertainty around the outcome of the changes will remain: The new Baremo table will still have to be tested in court, increasing the likelihood that any initial estimates of the sector’s loss ratio will have to be raised - unless of course this phase coincides with considerable rate hikes.
Read my article for more details on Baremo and also its implications for Solvency II compliance.