Will Annuities Become Standard Compensation for Severe Bodily Injury in Italy?
On 27 January 2015 the Court of Milan decided for the first time to award a substantial amount of compensation for a medical malpractice claim as an annuity. The ruling raised a lot of interest among insurers and lawyers because until then the standard approach with bodily injury claims that resulted in a severe permanent disability had been compensation with a lump sum that corresponded to the value of future nursing costs and other expenses.
Was the decision by the Court of Milan a signal for a change in standard practice? And what are the anticipated implications for claims assessment and cost quantification? How should insurers and reinsurers respond?
We believe that the compensation standard may change in Italy, not just to mimic other European countries, such as France, England and Germany, but also because annuity is the most appropriate way to compensate disability - from an economic as well as from a social point of view.1
Some months have passed since the ruling and no other relevant case has been reported, making it hard to imagine a rapid or significant change in judges' attitudes within a short period of time. However, given the experiences and practices in other European countries where compensation by annuities is standard, it’s not unlikely that Italy may follow this development.
The article, which I wrote with Lorenzo Vismara and Alessandro Simonato, shows that the size of a claim based on annuity is expected to be substantially higher than lump sums when the standard actuarial approach is applied.
Managing annuities isn’t easy for insurers and reinsurers. Insurers are obliged to assess the ultimate cost of a claim based on "recognized actuarial methodology", where such parameters as interest rate, claims inflation and the mortality table are critical. In today’s economic environment, low/no interest rates play an enormous role in the assessment of reserves; reserves have to be set at up to 100% of the ultimate sum.
As a consequence, higher loss cost will have a major effect on the reinsurance structures of ceding companies. Retention, capacity and contract wordings will certainly have to be reassessed but the most critical aspect will be the choice of the reinsurer. Primary insurers have to regard reinsurance as an asset, as the quality of the recoverables gains importance.2 Only reinsurers that can keep their promises are suitable for these contracts given that the duration of the liabilities can exceed 20 years.
- For more information, please refer to http://www.genre.com/knowledge/publications/claimsfocus-pc-201309-en.html.
- See also Joaquin Oreja’s blog: http://www.genre.com/knowledge/blog/reinsurance-recoverables-are-they-ignored-assets-en.html.