Why Are Reserves for Motor Liability Personal Injury Claims Being Geared Up?
The main driver behind the increase in loss reserves for major personal injury claims in motor insurance portfolios across Europe is routinely identified as the disproportionate growth in care costs, alongside loss of earnings.
To get a more precise picture, we compared the reserves for care costs and loss of earnings of two real claims in the German market, one from 1996 and the other from 2014. In both cases, 10-year old boys from the same social background sustained serious injuries to the skull and brain in a road traffic accident. In the 1996 claim case, monthly costs of EUR 2,050 were set aside for care, plus EUR 2,500 for loss of earnings. For the case in 2014, the same insurer reserved EUR 26,000 per month for care costs and EUR 5,000 for loss of earnings.
Discounted at a rate of 2%, this results in care costs of EUR 950,000 and EUR 11.6 million respectively, representing a difference of 1,121% for care (15% change per annum). For loss of earnings a total of EUR 719,000 was reserved in 1996, yet for the 2014 claim the amount was EUR 1.353 million - a 114% increase (4.3% change per annum).
But what caused such a trend in these mostly discounted, reserved heads of damage?
Certainly, medical progress has played a big role with regard to inflated care costs. Injured parties survive for longer and the financial expenditure for healthcare has increased. Also, where the majority of seriously injured people used to be cared for in nursing facilities or by relatives, today’s numerous outpatient nursing services provide professional, yet cost-intensive, care at home.
With regard to the increase in amounts claimed for loss of earnings, higher retirement age is certainly a factor, with normal wage increases responsible for increases in monthly expenditure. But there are also "technical" reasons for the increases. In the past, reserves were often not calculated with precision - relatively low lump-sum reserves were instead created. Manual calculation was difficult and reserves rarely adjusted in light of the number of claims.
These days most claims handlers have access to IT programs with which they can quickly calculate an entire claim using the latest mortality table. They can even easily factor in annual inflation. Today, forming an accurate reserve for individual cases with a considerably lower interest rate is standard practice. Pensions are paid nominally until a final settlement can be reached by reserving the concrete amount to be paid. The expected inflation is also sometimes specified as an additional factor.
Can we expect such a disproportionate increase in reserves for care costs and loss of earnings to continue?
This is a harder question. The increase in costs due to medical advances, longer life expectancy and potentially lower discount rates should play a role in coming years. It’s likely that reserves for care costs and loss of earnings will continue to grow even faster than implied by the statistical costs index.
However, one must remember that one-off events have been major contributors to the increases observed in recent decades, e.g. the introduction of care insurance or the fundamental decision to create reserves realistically and on a case-by-case basis. As a result, notwithstanding new one-off events occurring, we don’t expect increases to continue anything like they have done in the previous 20 years.