Bodily Injury Viewpoints for Europe by d-signsolution.com

Bodily Injury Viewpoints for Europe

PartnerRe

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© 2008 PartnerRe 90 Pitts Bay Road Pembroke HM 08, Bermuda Guest Contributors Dr. Rudolf Beisse, University of Utah, BG Unfallklinik Murnau Dr. Hélène Béjui-Hugues, AREDOC François Bucchini, CEA Guy Chappuis, Bâloise Jean-Louis Gauvin, Morneau Sobeco Janne Jumppanen, Finnish Motor Insurers Center Paul Kuhn, Allgemeiner Deutscher Automobil-Club e.V. (ADAC) Philip Livingston, Motor Accidents Insurance Board (MAIB), Tasmania Jürgen Mesecke, PARC Daniel Miles, Norwich Union Almudena García Pérez, Linea Directa Paul-Henri Rastoul, AXA Maurice Truffert, Maurice Truffert Consulting (MTC) David Wilkinson and Nick Quarrie, Dewey & LeBoeuf PartnerRe Contributors Emmanuel Bécache Robert Boghos Yvonne Dulong Sylvain Jarrier Jean-Pierre Kervella Léa Nefussi Salvatore Orlando Thomas Schneider Stephan Schrecke François Vilnet David Waddell Editors Dr. Sara Thomas Natalia Vayner-Heyraud François Vilnet Graphic design d signsolution, Zurich For questions concerning the articles in this publication or to arrange a discussion, please contact: Client & Corporate Communications, Paris Telephone +33 1 44 01 17 17 For more copies of this publication or for permission to reprint, please contact: Corporate Communications, Bermuda Telephone +1 441 292 0888 Telefax +1 441 292 7010 This publication is also available for download under www.partnerre.com The views in this paper are the opinions of the contributors themselves and do not necessarily reflect those of PartnerRe. The discussions and information set forth in this publication are not to be construed as legal advice or opinion. August 2008, 4000 en

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Foreword

A natural consequence of the closer integration of markets across Europe, and increased mobility of populations in the European Union, is to focus attention on the unfortunate victims of accidents that result in serious bodily injury claims. While victims continue, in many cases, to be frustrated by long delays in claim resolution, closer integration has highlighted serious inconsistencies across European states in standards for compensation, care and rehabilitation. At the same time, the costs of medical care and post-treatment assistance have been rapidly rising and there has been a change in award expectations fuelled by an increasing “compensation culture”. All this has created a confused picture of high inflation and unpredictability in the levels of bodily injury awards. This presents serious challenges to the insurance and reinsurance industry which often provides the main funding mechanisms for serious bodily injury claims. Hampered by a lack of reliable public data on bodily injury claims, and surprised by the large increases in reserves needed to provide for claims resulting from accidents occurring many years in the past, insurers and particularly reinsurers have been challenged to determine a fair risk transfer price. This increased uncertainty can result not only in higher premiums for risk bearing but potentially in an unwillingness to provide coverage. Structural solutions in coverage, increased data transparency, harmonization and objectivity in award standards can remove uncertainties and improve our ability to provide for bodily injury victims. The medical, legal, insurance and reinsurance professionals who have kindly contributed articles to this publication present their informed viewpoints on various aspects of bodily injury. They provide valuable insights into current challenges and discuss specific solutions that have been introduced or are currently considered within their areas. While the majority of the articles refer to European markets, several look at interesting examples of bodily injury legislation and practice from outside of Europe. I would like to thank all of the authors for their efforts and contributions to “Bodily Injury: Viewpoints for Europe”. I sincerely hope that these views will foster further discussions and exchange of ideas across disciplines and professions. After all, we all share a common objective: consistent and fair treatment of bodily injury victims across the European Union as well as sustainable funding mechanisms in an environment where care and rehabilitation are becoming increasingly complex and expensive. Costas Miranthis Chief Executive Officer PartnerRe Global

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Table of Contents

European Overview Introduction to Bodily Injury Issues François Vilnet, PartnerRe Serious Bodily Injury Trends François Bucchini, CEA Long-term Care on the EU Agenda Maurice Truffert, Maurice Truffert Consulting (MTC) Potential Impact of the 5th Motor Insurance Directive Emmanuel Bécache and Léa Nefussi, PartnerRe Legal Basis The Legal Basis of Personal Injury Awards in Germany Paul Kuhn, Allgemeiner Deutscher Automobil-Club e.V. (ADAC) A Changing Legal Landscape in England and Wales David Wilkinson and Nick Quarrie, Dewey & LeBoeuf Israel Compensates for Lost Future Earnings Stephan Schrecke, PartnerRe Medical Aspects Advances in Spinal Surgery Dr. Rudolf Beisse, University of Utah, BG Unfallklinik Murnau Studying Minor Cervical Trauma Injuries Guy Chappuis, Bâloise A Scale Guide for Non-economic Bodily Injury Damages Dr. Hélène Béjui-Hugues, AREDOC

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5 6 13 16 20

23 24

32 39

45 46 51 57

Case Management and Rehabilitation Active Rehabilitation Management, Germany Jürgen Mesecke, PARC A Shift in Claims Management, France Paul-Henri Rastoul, AXA A Centralized Approach to Compensation, Quebec Jean-Louis Gauvin, Morneau Sobeco A Solution for “Lifetime” Care Needs, Tasmania Philip Livingston, Motor Accidents Insurance Board (MAIB), Tasmania

63 64

Compensation Frameworks Bodily Injury Trends in the U.K. Daniel Miles, Norwich Union French Reforms Promote a Fairer Deal for Victims Yvonne Dulong, PartnerRe The Baremo and the Consorcio, Spain Almudena García Pérez, Linea Directa Finland’s Streamlined Approach Janne Jumppanen, Finnish Motor Insurers Center

83 84

70 74 78

91 95 101

Reinsurance Issues Reinsurance Pricing Issues and Products David Waddell, PartnerRe Periodical Payment Orders in the U.K. Robert Boghos and Sylvain Jarrier, PartnerRe Long-tail Reserving Challenges Jean-Pierre Kervella and Thomas Schneider, PartnerRe

107 108 116 119

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European Overview

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The four articles in this opening chapter introduce the current bodily injury issues in Europe and explore actions being taken at the European Union (EU) level as regards data capture, long-term care provision and statutory limits for motor insurance.

page

Introduction to Bodily Injury Issues Setting the stage for all the other articles in this publication, this paper outlines the principal issues and measures required to more effectively manage and harmonize bodily injury compensation across the EU.

Serious Bodily Injury Trends There is still room for improvement in bodily injury compensation for large claims, especially as regards transparency and equity. Actions should start at the national level, including â&#x20AC;&#x153;reference systemsâ&#x20AC;? to reduce award disparity and stabilize inflationary trends, and appropriately qualified medical specialists, lawyers and judges.

Long-term Care on the EU Agenda With ageing populations, demand for long-term care in Europe continues to rise while financing and access to care varies depending on cause, insurance and social system. This article reviews how the EU is looking into ways to supplement domestic approaches to long-term care, and at the social security pillar under consideration in France.

Potential Impact of the 5th EU Motor Insurance Directive in Europe Claims inflation and the wide range of minimum limits adopted in EU countries have prompted an increase in the statutory limits. The impact of this change will depend on the current limits offered in each market â&#x20AC;&#x201C; if policy limits increase, the loss burden (and re/insurance pricing) will likewise increase. The Directive has prompted legislators in Portugal to bring additional rules for claims management and evaluation.

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Introduction to Bodily Injury Issues François Vilnet, PartnerRe

François Vilnet is Deputy Head of Global Business Development at PartnerRe. He opens this publication with an outline of the challenges involved in effectively harmonizing risk data and bodily injury compensation across the EU, while also setting the stage in terms of where the other articles in this publication will add depth and example to the topic in hand.

The number of accidents in Europe remains high, while risk and claims data availability issues have prevented appropriate preventative measures and accentuated re/insurance pricing difficulties. In addition, if left to develop, high loss inflation and award and claims inconsistency for large bodily injury claims threatens the solidarity process for EU accident victims and could lead to a convergence towards the highest amounts both within and across EU markets. Important considerations for the future include: a common database by market (and comparable at the European level) for all bodily injury related accident claims; reference scales to mitigate claims inflation and re/insurance reserving issues; as well as common market approaches to the handling of large claims across lines of business and further development of claims case management. Introduction An estimated 50 million accidents occur annually in the EU. The resulting injuries have a devastating effect on victims. At the same time, there are some significant issues principally relating to sustainable financing on the one hand, and to treatment and compensation equity for accident victims on the other. To summarize the main problems: • There is a distinct lack of quality risk data which has prevented appropriate and timely corrective actions from being taken at both the national and EU level. • There is a lack of claims data for all accident insurance lines and across markets, leading to pricing difficulties. • Large bodily injury claims inflation has been at close to 10 % a year for the past 20 years in some markets. This is placing an ever increasing financial burden on public funds, insurers and reinsurers.

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• There is a lack of equity for accident victims: compensation varies significantly among different countries and insurance systems, as does treatment and follow-up assistance. • Long delays in terms of receiving compensation are commonplace. Despite the efforts of the EU and national authorities to apply accident prevention policies, cost control measures, and in some cases public insurance schemes, costs continue to rise at above inflation. Without further strong action and legislation there is a risk of negative impact on long-term care and national health systems and an undermining of both private and public finances. We begin this introduction with a look at accident risk in Europe and the associated risk data issues, followed by a review of the loss trends, market reactions and important further considerations for the future of bodily injury indemnification and support. Accident risk data There is no complete EU data source for accidents and bodily injury. Many national health information systems do not report reliable numbers of injuries by either cause of accident, hospital stay or disability rate (apart from for motor). Definitions of injury and cause category are also not easily comparable by line of business or EU market. To improve this situation several initiatives are now being pursued:

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• The European Association for Injury Prevention and Safety Promotion (EUROSAFE) is seeking to provide comparable data through the EU Injury Database (IDB). This injuries coding system was initially established for non-fatal home, leisure and sport accidents based on EU hospital treated injuries. The aim is to extend this to record all injuries. • The only existing international database with consistent and comparable motor accident data is the Organization of Economic Cooperation and Development (OECD) International Road Traffic and Accident Database (IRTAD). • The OECD and the International Classification of External Causes of Injuries (ICECI), sponsored by the World Health Organization (WHO), are also setting standardization to accident cause, event and circumstance.

To give an indication of risk frequency, we estimate that approximately 25 million bodily injuries occur annually within the EU. Table 1 presents our estimates of the number of accident injuries by severity and insurance line of business. These figures are approximate and are based on the available data and on our own assumptions to accommodate data gaps and definition discrepancy.

Total number of cases Registered incidents

50 million

Deaths

250,000 (68 % unintentional) 5 % of all deaths, 45 % of deaths for < 25s

Bodily injuries Serious bodily injuries Large bodily injuries8

Motor

Motor trend Marine per annum Aviation & Transport

Personal accident

Violence/ selfinflicted1

Work 2

Liability

45,000

– 4 %3

110,0004

60,000

6,000

30,000

1 million6

150,000

100,0007

25 million 5

1.5 to 2 million

Accident rate and prevention Motor accident rates are linked to density of population and motorways, culture and prevention measures, and also individually to the type of car and age group involved. The traffic ratio (deaths per number of vehicles) and density ratio (deaths per million of inhabitants) vary between countries, with Nordic countries and the U.K. reporting the lowest figures.

< 1,000

– 2% 500,000

25,000 Table 1 Estimates of annual accident numbers and severity based on 2005 data from the CEA9 and the EU IDB and on assumptions made to take into account definition and data availability issues. The figures cover motor, liability and medical malpractice accidents. There are no specific available statistics for other accident causes, such as natural catastrophes.

1 2 3 4 5 6

Underestimated in Europe as definitions and sources vary and injuries are not always declared or registered. Many EU countries have public schemes. Deaths are decreasing by 5 to 6 % in France, Luxembourg and Belgium. Elderly (>65 years): 50 %; Children (<15 years): 10 % Defined here as permanent disability Elderly: 40 %; Children: 5 %

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Mainly medical malpractice Defined here as above 50 % disability rate. Large injury claims represent a small proportion of all injuries and markets are not always willing to share data. Markets generally have motor databases, but even then large claims data is not separately reported and monitored. The European insurance and reinsurance federation

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The European Commission (EC) has identified accidents as a major concern area. Its recommendations for monitoring and preventing accidents and promoting safety were adopted in June 2006. A 2007 Framework Program, FP7 will encompass health and security and fund research and prevention in these areas. To date, most accident prevention measures have been concentrated in motor, including the following: • In 2001, the EC produced a White Paper, “European Transport Policy for 2010: time to decide” in which it set the goal of halving the number of transport related deaths in the EU by 2010. • Nordic countries have some of the strongest policies to lower the number of driving-related accidents and deaths, such as “Vision zero” in Sweden. • Car safety improvements in Europe are monitored through the Euro NCAP (New Car Assessment Program) which is based on a U.S. concept. • Insurers have set up initiatives to encourage safer driving and accident prevention, including “pay as you drive” policies. • Other EU policies such as “sustainable growth” and conservation measures, prompted by high oil prices, should also limit car use and speed, encourage collective transport use and limit transport by truck. EUROSAFE is planning actions for a safer Europe with a program running to 2013 and a project to develop best practices and strategies for the reduction of injuries. In addition, consumer associations such as the European consumer voice in standardisation (ANEC) are seeking improved preventative measures for product defects and other accident causes, and an EU network – the National Focal Persons for Violence Injuries Prevention – is in place to introduce national plans and policies aimed at reducing violent incidents.

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European trends in bodily injury insurance We now turn to how accident risk is impacting re/ insurance loss development in EU markets and to the drivers behind the trends. Premiums Although motor third-party liability cover is mandatory in all EU countries the cost to the insured varies from around 40 % (Latvia) to 85 % (Italy) of the total motor premium. The EU average is around 55 %, equating to around € 65 billion. Taking into account the average loss experience for bodily injury of around 60 %, the bodily injury premium component can be estimated at around € 40 billion. The EU accident premium can be estimated at around € 50 billion. This includes compulsory covers (workers’ compensation, schools) and voluntary covers (personal accident). For general liability we estimate 15 % to 20 % of the overall premium, depending on market, mix of business and weight of medical malpractice. Claims The lack of available large claims data for accidents has had several negative consequences across Europe: • Serious comparability and benchmarking cannot be conducted between lines of business and market. • Underlying trends remain hidden in individual sectors. • Missing data has contributed to market variability in compensation awards for comparable large bodily injuries. • It is difficult to take appropriate and timely preventative actions.

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Furthermore, large bodily injury claim costs have increased at above general rates of inflation in all EU markets. Annual rates lie between 3 and 10 %, and the average values for the last 15 years range from 30 % in Spain to 200 % in Germany, 300 % in France and 400 % in the U.K. A study by the Association of British Insurers reported 20 % large claims inflation in motor for the period 1996 to 2007. The largest bodily injury claims, previously in the range of € 5 to 10 million in markets such as France and the U.K., now commonly exceed € 10 million (€ 15–20 million for individual cases in the U.K.). Page 119, “Long-tail Reserving Challenges”, in the Reinsurance Issues section of this publication, discusses how this large claims inflation impacts insurance and reinsurance pricing, necessitating repeated upward adjustments to large claim reserves. The principal inflationary loss drivers are reviewed below: Loss driver: medical factors The annual EU cost for care and treatment associated with all injuries is estimated to be around € 15 billion, 1.5 % of total health expenditure. Overall cost has increased in line with the growing number of elderly people, and with the higher labor costs for medical care and more expensive treatment. In fact, the medical care price index has grown faster than general inflation in all markets. Cost of care is the largest component of large bodily injury claims in all mature markets (up to 60 % of the claim) and has the largest inflationary trend principally due to wage inflation. In addition, while medical progress has saved more lives, this has increased the number of large bodily injury claims. Relevant articles on this topic include page 16, “Long-term Care on the EU Agenda”, which looks at this issue from a financing perspective and page 46, “Advances in Spinal Surgery”, which gives an example of medical progress.

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Loss driver: legal factors Markets have different compensation systems, social systems and litigation trends, which also influence the claims landscape. One of the major changes in Europe in recent years has been a significant increase in compensation culture – this has changed the way that victims, lawyers and judges concur in raising the expectations and amounts awarded beyond what is economically justified. Judges are taking a more pro-consumer attitude towards victims and access to justice and lawyers has become easier. In addition, there are now more victim support associations, such as the European Federation of Road Traffic Victims (FEVR). Tort system The evaluation of an award by the tort system is based on different guidelines for personal injury damages depending on jurisdiction, source of law (code or case law), line of business and market. Apart from the scheme used for European civil servants to assess non-economic damages, there is no unified process. The cost of compensation for cases dealt with by the courts is generally higher than for non-litigation agreements; legal costs tend to increase, with success fees for specialized lawyers reaching 30 % of the claim amount in markets such as the U.K. Legal uncertainty Legal change can have a retroactive influence on claims, which adds to the general uncertainty, complicating pricing and reserving. In some markets, such as France, cases may be re-opened following aggravation of the victim’s medical or social condition. For further detail on legal systems and developments, refer to page 24, “The Legal Basis of Personal Injury Awards in Germany”, page 32, “A Changing Legal Landscape in England and Wales” and page 39, “Israel Compensates for Lost Future Earnings”.

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Loss driver: additional factors Interest rates Changes in interest rate affect the ultimate value of a claim through the applied discount rate, thereby impacting reserving and re/insurance pricing. Limits Inflation has in some cases been facilitated through the absence of a cap on liability. Major catastrophes have highlighted this issue and most markets have now set up limits for catastrophe loss. Unlimited third-party liability is required in some countries; this is linked to market practice and does not bring any specific value as capital resources are not unlimited. The EU 5th Motor Insurance Directive has also raised the minimum cover per victim to € 1 million. Removing the earlier liability cap is likely to contribute to claims inflation in countries that had remained with the previous minimum statutory limit (see page 20, “Potential Impact of the 5th EU Motor Insurance Directive in Europe”). Uninsured drivers The number of uninsured vehicles in the EU is estimated at 4.5 million. Numbers have tended to increase with the rising insurance costs linked to claims inflation. This has led to guarantee funds organized by the state or motor insurers with levies on policies that increase costs to the average insured. Initiatives to reduce the number of uninsured drivers include that by the U.K.’s Motor Insurance Bureau (MIB). Variability in claim amounts There are significant differences in large bodily injury claim amounts for the same injury across line of business and market (while there is no easy large claims benchmark, they can vary by up to a factor of 10 for the same injury type, from a weighted average of € 1,500 to € 15,000). France has the highest average claim value, followed by Germany and Austria. Spain and EU newcomers have amongst the lowest. This variability reflects the respective medical, social and legal factors,

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including settlement type, as well as insurance line and cover. A relevant example of market differences by injury type is the strongly contrasting experience of minor cervical trauma (“whiplash”) injuries across Europe. The results of a study into these differences are reviewed on page 51, “Studying Minor Cervical Trauma Injuries”. What’s changing? Solutions to reduce this heterogeneity and deliver a more efficient and aligned service to the injured while helping to control claims inflation, include the following: • • • • •

reference scales no-fault systems first-party insurance revised payment methods regulations to curb the impact of compensation culture • case management and centralized claims handling. For an example of regulatory reform see page 91, “French Reforms Promote a Fairer Deal for Victims”. For an EU level opinion piece on where and how change needs to take place, refer to page 13, “Serious Bodily Injury Trends”. The above listed points are expanded upon below. Reference scale A reference scale (or framework) for bodily injury awards seeks to standardize the benefits given to victims across lines of business and can structure and monitor claims information and increase the number of out of courts settlements. With the incentive to go to court reduced, settlements are received faster, are more assured and legal fees are reduced. To be effective, a scale requires complete and updated market data. Denmark’s national health system applies a legal reference scale to all bodily injury claims. Belgium has an indicative reference scale. In France, a reference scale has been set up for medical malpractice claims by the National

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Office for the Indemnification of Medical Accidents, based on court awards and bodily injury claims data. Relevant articles include page 57, “A Scale Guide for Non-economic Bodily Injury Damages”, page 95, “The Baremo and the Consorcio, Spain” and page 101, “Finland’s Streamlined Approach”. No-fault systems Perhaps the most significant legal change is the no-fault system for specific lines of business. These are intended to remove inefficiency in terms of establishing fault (although there are potential drawbacks in terms of moral hazard). Examples include strict liability for motor in Finland and in some Canadian and Australian states, and for high magnitude liabilities including nuclear risk in Europe. New Zealand introduced a no-fault system for all personal injuries, including work-related accidents and for certain medical errors supported by the Accident Compensation Commission (ACC), which centralizes administration and compensation, and has reduced compensation costs compared to under the previous tort system. First-party insurance Insurance solutions have been introduced in some markets to complement, or as an alternative to, liability covers to avoid legal dispute and/or lack of cover, such as for terrorism. However, these are voluntary and do not fully remove compensation inconsistency for victims. Examples include France’s GAV (Insurance for Accidents of Life), launched in 2001, which covers a wide range of accidents: private life, medical malpractice, violence, terrorism and all types of catastrophe. Settlements Lump sum vs. periodical payments Lump sum settlements provide a significant capital sum but depend heavily on life expectancy and have the potential to be unwisely spent. Periodical payments address these risks. In some markets, including France, Belgium and the U.K., large claims tend to be compensated on a lump sum basis with care costs provided by an annuity. Other markets,

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such as Germany, split settlements into lump sum and long-term periodic payments; the payments may be reviewed by courts in case of aggravation of the injury or costlier treatment. See page 116, “Periodical Payment Orders in the U.K.”. Structured settlements These were introduced in Canada in the 1970s and then spread to the U.S. and Europe. They can be fixed or variable, according to changes in the victim’s condition. Usually, the insurer or a third party makes periodic payments to the victim in the form of a tailored package. They are designed to bring increased security and flexibility to the victim via a definite stream of revenue, and to the insurer, because they can be adapted to the victim’s situation. The contract may include needbased guarantee periods and payment frequencies. In some markets, the settlement contract can be sold to financial institutions in return for a lump sum. Claims handling Handling claims varies by market, line of business, and type and size of company. At one end of the scale companies pay the indemnity and thereafter do not follow the victims in any way. At the other end, claims are managed on a case basis with a growing emphasis on follow-up and rehabilitation (helping an injured person return to work and regain a level of independence and quality of life). Case management is common in the U.S. and is developed in the U.K. (where organizations such as the International Underwriting Association and Bodily Injury Management Association are centralizing data and practices) and in the Nordic and German-speaking countries. For examples, refer to page 64, “Active Rehabilitation Management, Germany”, page 70, “A Shift in Claims Management, France” and page 84, “Bodily Injury Trends in the U.K.”.

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As large claims represent only a small segment of all bodily injury claims and are based on a required long-term commitment, outsourcing bodily injury claims handling to specialist companies tends to be the more efficient and economical option. In some cases this is happening at the state level, such as in Canada (page 74, “A Centralized Approach to Compensation, Quebec”) and Australasia (page 78, “A Solution for “Lifetime” Care Needs, Tasmania”). In Europe, Finland and Sweden have set up centralized bodies for motor bodily injury (see page 101, “Finland’s Streamlined Approach”). In Sweden, claims are compensated under the Swedish Traffic Damage Act (1975), which stipulates that insurance companies must consult the Swedish Road Traffic Injuries Commission (SRTIC) to ensure a uniform, fair and reasonable indemnity for victims. In more than 90 % of cases shown to the Commission, the parties have agreed to its recommendations and have concluded with an out of court settlement. Reinsurance Most large bodily injury claims are covered by reinsurance. Reinsurance not only smoothes claims, but is a good indicator of loss development and potential ultimate claims value. Rising cedant retentions are increasing the involvement of cedants in these claims, and reinsurers are introducing measures to better control and distribute large claims inflation. Page 108, “Reinsurance Pricing Issues and Products” explains all these points in detail.

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Considerations for the future Many of the solutions to the bodily injury issues explored in this report are relatively recent and/or apply only in certain markets. To prevent an uncontrollable escalation of risk and cost deviation, and to improve equity and service for accident victims, Europe must take an overall and long-term view of large bodily injury claims development, tackling the related issues and setting up a harmonized legislative indemnification framework. Insurers and reinsurers have an important role to play in terms of establishing best practices, including the development of case management and rehabilitation of victims. As we face the many challenges ahead, the analyses and viewpoints presented in the articles that follow underscore the need for: • A common database by market for all bodily injury related accident claims based on the IDB structure and with a particular focus on large claim trends. Market databases should also be comparable at the European level, necessitating at the very least common definitions of injury and cause. • Reference scales to control claims inflation and to improve certainty regarding insurance and reinsurance reserves. • Common market approaches to the handling of large claims across lines of business. • Further development of case management via: – outsourcing to specialized service companies or medical care associations – common agreements (resource pooling) between different companies or at the regional or market level.

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Serious Bodily Injury Trends François Bucchini, CEA

François Bucchini is the Chairman of the CEA1 Motor Insurance Committee, AXA Group Technical Director and CEO of AXA Cessions. In this interview with Yvonne Dulong, Bodily Injury Claims Manager at PartnerRe and Jean-Luc Thomas, PartnerRe Business Development Officer, he discusses how, although mostly satisfactory for the majority, there is still room for improvement in large claim bodily injury compensation, especially as regards transparency and equity for motor accident victims. His view is that actions should start at the national level, including “reference systems” to reduce award disparity and stabilize inflationary trends, and with appropriately qualified medical specialists, lawyers and judges.

As Chairman of CEA’s Motor Insurance Committee, what is your view of compensation for bodily injury victims of motor accidents in Europe? First of all, we should remember that European motor insurance has been around far longer than the European Union, the “green card” being one of its most obvious outcomes. All that seems natural now, but it was one of the first concrete signs of a European insurance. Since then, things have obviously changed. Even though, for the moment, each country has its own compensation system, all these systems are more effective than in the past, especially in the way they have sped up the awarding of compensation. Overall, bodily injury victims receive satisfactory compensation from European insurers. In France, for example, 90 % of bodily injury claims are settled under the IRCA agreement (convention of bodily injury claims settlements). Nevertheless, we should still try to improve these schemes, especially as insurers’ and victims’ aims converge in several areas. In particular, we need greater transparency and equity.

What are the main avenues to improving transparency and fairness? In terms of assessing damages, what we need is a nomenclature with a reference system. A reference system could serve as the framework for each listed impairment (physiological, economic, aesthetic, etc.), thus reducing the disparity between amounts awarded to victims. For home assistance, for example, the number of hours per day would be precisely defined together with the hourly cost which may vary, as it does in France (from about € 10 to € 17). From a European perspective, through careful supervision of medical assessment, it should be possible to take the assessment of physical damage further though opinions on this may be divided. What we need throughout the European Union is for medical assessment to be done by appropriately qualified specialists, as is the case in Belgium, France and Spain, in contrast with other European countries where non-specialist doctors fulfill this role. Specialization in this technical area also concerns lawyers and judges who must have highly specific knowledge.

In light of the current disparities, the CEA considers that action should first be taken at national level in each member country in order to achieve a preliminary level of harmonization and to prevent victim compensation from resembling a lottery. The main problem for insurers in those countries with escalating serious bodily injuries is the lack of foresight into ultimate costs. 1

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The Comité Européen des Assurances

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In the field of compensation, victims may find the lump sum or annuity methods perplexing. Why chose one over the other? If there is a choice of lump sum, which table and actualization rate should be used to calculate the capital? These concepts, which are not always fully understood even by some of the professionals involved in compensation – unless they are specialists in actuarial calculation – are even less understood by the victim. Several tables are used within one country and the actualization rate can vary from victim to victim. In some countries, the move from annuity to lump sum can be done without reference to tables. Improvements which could benefit victims as well as insurers are being looked for in other areas. These cover, in particular, supervising the use of allocated awards to ensure that they are indeed used as primarily intended. Another alternative is the provision of services by a service-providing company both for the purchase of specific equipment and home assistance. You have not mentioned a scale? The concept makes magistrates and lawyers nervous, so we should refer rather to a reference framework. The desire for convergence can run up against the practices and prerogatives of the various parties involved. Spain is an interesting example because there were problems with bodily injury compensation. Basic work was done which resulted in the creation of a scale. This scale saw the light of day only after lengthy negotiations with judges who left themselves room to maneuver. Although a reference framework, even a scale, is preferable, compensation cannot result from the rough application of a process based only on reference systems and methods.

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In dealing with these cases, especially serious bodily injury claims, a multi-disciplinary human approach is required. Hence, judges must have a degree of freedom and although, in some countries, the amount of legal fees may seem excessive, the judge’s presence guarantees that the victim’s rights will be respected. In any event, scales will not resolve all the issues and expertise is also an important factor which can have an impact at the very start of the process. You mentioned improvements which ought to be made in each country, but what do you think about harmonization at the European level? Although harmonization between countries is obviously preferable, it will not be possible in the short term until markets have implemented the improvements we have already mentioned. Furthermore, at compensation level there are even wider differences between those countries which have just joined the European Union. Compensation costs will only rise gradually and be the source of major difficulty for the insurers in those countries. There is a topical question with regard to the European Motor Directive in preparation concerning compensation for victims where the accident occurs in a place other than their place of residence. This Directive would give victims the choice between the jurisdiction of the place of the accident or that of their residence. It could lead to difficulties, particularly for smaller companies or new entrants, in the event of very substantial claims, thus generating the risk of insolvency or even non-insurance. Finally, if this provision was extended to the U.S., which is possible in the event of reciprocity agreements, the result would surely be a rise in costs even though the number of claims involved in this case is relatively small.

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Reinsurers are worried about serious bodily injury claim trends in certain markets. What is your opinion? Can you suggest any solutions? Serious bodily injury trends result from different phenomena. You have to consider that some of these phenomena are difficult to control and therefore we need to think about market solutions in certain cases. Hence, for the French market, re-opening cases, from a legal point of view, 10 years after they have been closed, is not part of the normal play of insurance: a specific system, such as a guarantee fund with reinsurers involvement, would be more appropriate. A reference framework should make it possible to stabilize these trends. Reinsurersâ&#x20AC;&#x2122; intentions differ depending on the market: in France and in the U.K., their role is limited to smoothing out substantial claims. The withdrawal of certain reinsurers seen in certain markets will reduce competition and increase retentions. This could be prejudicial, especially for small and medium-sized companies because over-restrictive retentions would increase the volatility of results and lower the solvency margin. Therefore, this situation would not help markets.

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26.6.2008 18:15:55 Uhr

Long-term Care on the EU Agenda Maurice Truffert, Maurice Truffert Consulting

In addition to being the Director of Maurice Truffert Consulting (MTC), Maurice Truffert is in charge of the insurance section of the Master’s in Risk Management at the leading French engineering school, Ecole Centrale d’Ingénieurs. He is also lecturing Reinsurance and International Insurance at the University of Paris II, Panthéon Assas. In this article he considers how ageing populations are increasing demand for long-term care, while financing and access to care vary depending on cause, insurance and social system. As an example of a solution at the national level, France is considering a new social security pillar for long-term care due to all causes. At the European level, the EU is looking into ways to supplement domestic approaches to long-term care and handicap issues.

Introduction Long-term care, severe handicap and major bodily injuries are closely related each with various degrees of disability irrespective of the cause. This is a field where most countries in Europe lack both statistics and, above all, harmonized financial resources to deal with it effectively. Each country faces the question of how to finance long-term care, which may become a major future cause for concern.

The program outlines all the priorities in its main chapters and includes various research themes. In the chapter on healthcare, one of the major issues is research in personal autonomy within the theme of long-term care, a major health concern given ageing populations.

For a number of years, issues related to long-term care have been the subject of analysis at the European level as well as within various countries. Europe provides a vital driving force through its research and analysis programs, demonstrating a commitment to promoting progress in critical fields.

• Develop and approve a method for analyzing the long-term care provisions in European healthcare systems. • Devise a model to guarantee quality of service which also implements preventive and physical therapy incentives and offers support to informal care structures with an adequate interface with health services.

France offers an interesting example given the growth in public aid and insurance-based solutions – evidence of a political push for change and economic solutions. The European research program on long-term care Following the Lisbon Agenda of 2000, the EU plans to allocate 3 % of its GDP to research by 2010. The seventh framework program for research and development (PCRD-FP7) is an ambitious program with a significantly higher budget. Implemented in early 2007, its focus is on research, technological development and demonstration activities. The program is scheduled to run for six years (2007–2013).

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The following two actions are outlined in the section “Healthcare System and Long-term Care for the Elderly”:

The FP7 program recommends addressing the issue of long-term care while stipulating that adopted solutions are not intended to replace current domestic approaches in each EU country. Rather, they are meant to supplement existing approaches to ensure a more uniform approach to the issues relating to long-term care.

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The program’s goal is to combine current informal solutions with institutional ones, allowing a high degree of flexibility in how the harmonization process is carried out. It assigns responsibilities to all of the key stakeholders both on national and European levels, in the following areas: • methodology research to analyze foreseeable developments • prevention and physical therapy • coordination • harmonization. Although the solutions to be implemented will have some degree of national scope, issues related to the population movements (such as the significant number of elderly citizens preferring to reside in the EU’s southern nations where the need for capacity may increase in the next two decades) must clearly be addressed at the EU level. In comments released when the FP7 program was presented in Brussels, the European Commission clearly confirmed the importance of allowing member states to control domestic healthcare systems. Therefore, the challenge is twofold: to overcome the differences in the welfare vision among different member states and to develop viable insurance solutions for citizens that are also tailored to the diverse situations in member states. Over the past 20 years, many solutions have been proposed and implemented in various EU countries. New laws have generally only endorsed solutions that have already been tested through individual or charity initiatives with the clear aim of keeping the elderly as independent as possible and for as long as possible in their normal environment.

Although a large number of EU countries share similar views of long-term care and severe handicap, some differences can be noted in the solutions applied in European countries. One such difference is the preference for home treatment in southern European countries versus specialized facilities for northern European countries. Developments in long-term care coverage in France At the June 2007 congress of the French Federation of Parents and Friends of the Mentally Disabled 1, the French president announced a plan to institute a fifth branch of the social security system to cover long-term care (in the broad sense of the term, covering all causes). For this reason, long-term care is no longer considered solely in terms of ageing, but also with regard to the consequences of illnesses and accidents. It is this all-inclusive approach that will likely lead to the streamlining of solutions and possible synergy between various resources and facilities. In addition to first responses with programs that develop home-care and specially adapted housing, there has also been growth in: • differentiated care facilities • retirement homes with medical facilities • physical therapy centers and specialized institutions (in particular for neuro-degenerative illnesses such as Alzheimer’s and Parkinson’s disease, and multiple sclerosis). The approach also includes coverage of accidents resulting in the loss of autonomy (the consequences of which entail adapting homes, possibly the assistance of a third party and treatment in specialized facilities).

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Union nationale des associations de parents et amis de personnes handicapées mentales

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There is an enormous challenge to be faced. The framework set out above entails the intervention of the state as the prescribing expert, key player or regulator in a field where current reviews and forecasts about the future are based on imperfect studies due to the difficulty of gathering and summarizing statistical data. Indeed, a working group at the French National Statistical Information Council (CNIS) during the latest handicap survey stressed the vital importance of improving statistical information in this field: “Considerations of the handicap framework in the last decade have all repeatedly led to the same twofold observation: firstly, that France is lagging in national statistics for handicaps, disability and long-term care and secondly, that the statistical tools used to study these issues are disparate and insufficient”. According to an INSEE 2 survey on handicaps, over five million people in France require regular assistance to carry out some tasks of daily life. Over two million receive a subsidy or disability pension for handicaps that very considerably in terms of type and origin. The main causes of severe handicap are as follows: • ageing • genetic, chronic and hereditary diseases • serious accidents, such as: – private life (or domestic), motor, etc. There are some 30,000 paraplegics and 6,500 tetraplegics in France (average age: 31), nearly two-thirds of such paralyses result from traffic accidents and 25 % from private life accidents. – workplace accidents (some 50,000 permanent disabilities recognized by assessors in the employee health insurance system).

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French National Institute for Statistics and Economic Studies

All the types of handicap above are covered by different and unrelated compensation systems, resulting in highly variable types of compensation. In the past, interventions by state or regional authorities aiming to ensure care for the elderly had led to the PAD 3 (long-term care and autonomy benefits), subsequently replaced by the APA4 (personal autonomy benefits) although the scope did not cover all the needs of persons requiring long-term care and also raised financing issues. Approximately one million people are currently eligible for APA benefits, of which 90 % is allocated to subsidies for hiring personnel. There are two complementary sources of compensation: • social security (the fifth branch) which falls within the scope of solidarity provisions • deliberate decisions by individual or collective pooling with products provided by insurers. Conclusion The EU has made it a priority to harmonize and coordinate long-term care and handicap policies in light of: • demographic shifts and the ensuing risks in quality of life for a growing number of elderly persons • the large number of persons suffering from serious bodily injury. The authorities and insurers must continue their search for solutions through risk pooling, either individually or collectively, as an extension of, or in parallel with, solutions implemented by EU member states.

3 4

Prestation Autonomie Dépendance Allocation Personnalisée pour l’Autonomie

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The issue of compensation and how to harmonize is key, even though compensation depends on the economic and cultural context in each country. It would be profoundly unfair and counter-productive to have diverging compensation systems by amplifying the differences by type (long-term care, motor accident, private life accident, illness or handicap). Although the causes may differ, the consequences are comparable for victims, patients and the elderly. Victim monitoring is another aspect where there may be joint approaches in terms to personal aid even if the extent of the injury, the age of the person and the type of service may differ.

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Bibliography CTNERHI – DREES DGAS, Le handicap en chiffres, summary by C. Brouard, February 2004. INSEE HID, “Historique et présentation générale de l’enquête handicaps, incapacités, dépendance 1998 – 2002”. INSEE première, “Le handicap se conjugue au pluriel”, October 2000. www.portailhandicap.com: “Les multiples facettes du handicap” by Dr Chantal Guéniot, May 2005.

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Potential Impact of the 5th EU Motor Insurance Directive in Europe Emmanuel Bécache and Léa Nefussi, PartnerRe

Emmanuel Bécache and Léa Nefussi are underwriters at PartnerRe for property and casualty business. Their article takes a close look at the forthcoming 5th EU Motor Insurance Directive (MID), which will raise the minimum statutory motor insurance limits. Prompted by claims inflation and the wide range of minimum limits adopted in EU countries, the impact of this change on claims, premiums and judicial process will depend on the current limits now offered in each market: if policy limits increase, the loss burden (and re/insurance pricing) will likewise increase. As an example of potential response, the Directive has prompted legislators in Portugal to bring additional rules for claims management and evaluation.

The new Directive The current minimum statutory Motor insurance limits in the EU were set in 1984 by the 2nd EU Motor Insurance Directive (84/5/CEE). In the meantime, claims inflation and the wide range of minimum limits adopted in EU countries, have prompted a revision of the minimum limits, as outlined in the 5th EU Motor Insurance Directive (2005/14/CE). The extent to which the 5th Directive impacts a specific insurance market will depend on the current limits offered in that market: ranging from no or little impact in countries that offer unlimited coverage for bodily injury, to potentially significant impact in countries that have remained with the former minimum limits. For example, the minimum limit for combined bodily injury and property damage per event will increase from € 600,000 to € 6 million for countries that choose the second option of the Directive.

Table 1 Minimum motor insurance limits as per the 2nd and 5th EU Motor Insurance Directives (MID). All limits are given in euros. The choice of option 1 or option 2 is made by the government of each respective country.

Minimum Motor Insurance Limits Option 1 Bodily injury, per victim Property damage, per claim regardless of the number of victims Option 2 Bodily injury, per claim

2nd MID (84/5/CEE)

5th MID(2005/14/EC)

350,000

1,000,000

100,000

1,000,000

500,000 if more than one victim

5,000,000 regardless of the number of victims

Property damage, per claim regardless of the number of victims Combination bodily injury/property damage per claim regardless of the number of victims

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A varied impact Western European countries (France, Belgium and Luxembourg) and some of the Northern European countries (the U.K., Ireland and Finland) already provide mandatory unlimited bodily injury. These countries can expect minimal impact from the new directive for bodily injury, though there may be minor consequences for property damage. Some Central (Germany and Hungary) and Northern (Denmark and Sweden) European countries have adopted, either by law and/or market practice, minimum covers that are in the same range of the future statutory minimum limits required by the 5th Directive. The impact in these countries should therefore be relatively low.

1,000,000 600,000

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100%

80%

60% P(LL < x)

Figure 1 Trended as-if large loss distribution of Italian motor third-party liability losses above â&#x201A;Ź 750,000 (the lowest market standard policy limit), before and after implementation of the 5th EU Motor Insurance Directive (5th MID). The graph shows the inflationary effect of the removal of lower, pre-5th MID policy limits. Losses incurred between 1995 and 2004, as of year end 2005. Source: PartnerRe.

40%

20%

0% 700,000

2,700,000

Before 5 th MID After 5 th MID

The most heavily impacted EU region is Southern Europe (excluding Spain) where minimum statutory limits are equal to or slightly above the current European minimums in force. Italy and Portugal provide good case examples of the potential impact to and approach of markets set to experience a large revision of limits. Italy: increase in large loss burden As shown in figure 1, without any other legal modifications, motor third-party liability insurance and reinsurance pricing in Italy will need to increase in line with the potential large loss burden following implementation of the new directive. The losses displayed in yellow relate to claims before implementation of the 5th Directive. They are developed but capped at the policy limit levels (60 % of policies are limited at â&#x201A;Ź 1.55 million). These thresholds will no longer exist once the minimum statutory limit for bodily injury per event is fixed at â&#x201A;Ź 5 million, neither for the original large loss distribution nor for the trended large loss distribution. The loss burden and particularly the large loss burden of excess of loss reinsurers would therefore increase as shown.

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Portugal: additional rules for claims management and evaluation The 5th Directive has prompted legislators in Portugal to bring additional rules for claims management and evaluation, which if implemented at the same time as the directive would limit the impact. A first law was passed in November 2006 defining the way that insurance companies should handle property damage claims and a law pertaining to bodily injury claims was published in 2007. The latter includes a timetable for policy limits and a strict agenda for claim settlements. It is also expected that the Portuguese Regulator will help develop official award tables in order to stabilize the compensation system and to improve early claim estimates. The use of such tables may at first increase the level of indemnity and bring a higher large claim frequency, but would then avoid an important dispersion of claims, limiting the effect of increased policy limits, reducing uncertainty around loss development and improving early claims evaluation. Without the effect of limit capping, loss burdens and thus insurance and reinsurance pricing will increase in some markets, but within the boundaries of all other relevant legal adjustments in those markets.

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Legal Basis

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Legislation and legal procedure relating to bodily injury loss compensation aims to create a legal framework that will effectively and efficiently accommodate a wide spectrum of loss type and circumstance. The reforms within each of the following country examples have developed to overcome the recognized stumbling blocks to achieving this goal. The first two articles in this chapter provide comprehensive legal summaries of bodily injury indemnification. The third shows how a change in legal precedent can impact loss inflation and outstanding claim reserves.

page

The Legal Basis of Personal Injury Awards in Germany A comprehensive legal review of how Germany compensates pecuniary and non-pecuniary loss components.

A Changing Legal Landscape in England and Wales With a focus on achieving a fair, flexible and manageable compensation system, recent legislative reforms have included revised payment and funding methods for damage awards, as well as provisions to prevent the â&#x20AC;&#x153;fear of being suedâ&#x20AC;? from stifling everyday life and to regulate claims management companies.

Israel Compensates for Lost Future Earnings A change in case law in Israel created an additional bodily injury indemnity component for lost future earnings. The change, which also applies to minors, is expected to increase the compensation awarded in cases where the injured person is under the age of retirement. Upward reserve adjustments have already ensued.

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26.6.2008 18:43:59 Uhr

The Legal Basis of Personal Injury Awards in Germany Paul Kuhn, ADAC

Paul Kuhn is a Lawyer and Head of Damages and Insurance Issues at ADAC (Germany), Europe’s largest automobile association. In this paper, he reviews the current legal framework for road traffic accident personal injury compensation in Germany, concentrating in particular on the amended assessment of non-pecuniary damages. From an EU harmonization perspective, it is important that the consideration of the individual case and circumstance has precedence over schematization. He recommends that this would best be achieved via assessment guidelines, which would ensure, for example, that an expertise prepared in Germany is also recognized in France or Italy.

Personal injury law Personal injury rights in Germany are mainly based on legislation. For road accidents, the relevant legislation is as follows: • 2nd Act amending the legislation on damages1 German Civil Code 2 • Road Traffic Act 3 • Law on Compulsory Insurance 4 • Regulation on Compulsory Insurance 5 • Law on Compulsory Insurance for Foreigners 6 • Law on Insurance Contracts 7 • Various commentaries on these laws. Decisions in respect of personal injury awards will further apply contract terms such as the General Terms and Conditions of Motor Insurance8 and tariffs in connection with a motor insurance policy. For accidents involving vehicles with a foreign registration, the Green Card system is also important. The above laws, regulations and contract terms define the scope of liability as well as who will be held liable and to what extent.

1 2 3 4 5 6 7 8

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Schadenrechtsänderungsgesetz Bürgerliches Gesetzbuch (BGB) Straßenverkehrsgesetz (StVG) Pflichtversicherungsgesetz (PflVG) Pflichtversicherungsverordnung (KfzPflVV) Ausländer-Pflichtversicherungsgesetz (AuslPflVG) Versicherungsvertragsgesetz (VVG) Allgemeine Bedingungen für die Kraftfahrtversicherung (AKB)

The calculation of compensation for personal injury is based on the rulings of the following bodies: • • • •

Federal Supreme Court (BGH) Higher Regional Courts (OLG) Regional Courts (LG) Local Courts (AG).

Damages for pain and suffering Recoverable loss The 2nd Act amending the legislation on damages entered into force on August 1, 2002. The Act stipulates that non-pecuniary loss will be compensated in the event of an injury or violation of the body, health, liberty or sexual self-determination 9. In such cases “reasonable monetary compensation” can be claimed. In Germany, this term is either interpreted in court or construed out of court between the damaging and the injured party. The law does not say which amount is to be paid for which injury. In particular, there is no point system for qualifying the injuries suffered, as in France or in Spain. The Larger Chamber for Civil Matters of the Federal Supreme Court 10 has to decide whether to consider all circumstances, including the financial situation and degree of fault, in the calculation of damages for pain and suffering. The court defines the purpose of damages for pain and suffering and identifies the various

9 10

Coma, vegetative condition, brain damage Großer Senat für Zivilsachen des Bundesgerichtshofs (BGH))

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circumstances to be considered: not only does the type, degree and duration of the injuries or possible disfigurements need to be considered, but also the financial situation of the parties and the circumstances leading to the damage. The Larger Chamber for Civil Matters defined a new guideline for jurisdiction. The dual purpose of damages for pain and suffering is now defined as follows: “The main purpose of damages for pain and suffering is to provide reasonable compensation for the loss or damage, for any impairment of life which is not of a pecuniary nature” 11. In addition, the judge is allowed to base the assessment of the damages for pain and suffering on all relevant circumstances of both parties. For the person responsible for the damage, the degree of the fault needs to be considered based on equity principles, subject to the cause of the injury and the person’s financial situation. For other (not yet quantifiable) losses such as future cost of medical treatment or loss of earnings, an out of court agreement with the insurer will ensure that it is treated as in the case of a declaratory judgement 12. Claims are statute-barred only after 30 years. Dual function Damages for pain and suffering in Germany have a dual function: compensatory and comforting. Compensatory The compensatory function provides compensation for physical, emotional and mental impairment based on severity of the injury, intensity and duration of the pain and suffering, time spent in hospital, medical treatment and incapacity for work as well as the healing process and result. Permanent disfigurements and physical deficiencies will impair the joy of life and result in an

11 12

BGH, Beschluss vom 6. 7. 1955 – Großer Zivilsenat 1/55, NJW 1955, 1675 §197 Absatz 1 Nummer. 3 BGB: In dreißig Jahren verjähren, soweit nicht ein anderes bestimmt ist, rechtskräftig festgestellte Ansprüche

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increase of the damages for pain and suffering. Emotional or mental disturbances (e.g. fear of loss of livelihood, reduced marriage prospects) and stress because of long court proceedings will also be considered when evaluating the damages for pain and suffering and finally the age of the injured person. Young people will suffer from their injuries longer than older people 13. Comfort The comfort function serves as a kind of penance and will depend on the degree of fault of the person responsible for the damage. In cases of “No fault”, the comfort function does not play any role. In cases of fault, somebody willfully injuring another human being should pay higher damages for pain and suffering than somebody committing a misdemeanor that could happen to anybody, such as in the event of an accident caused by a sudden onset of black ice. The cause of the damage will also be taken into consideration: somebody giving another person a lift in his car will in the event of injury be liable to pay damages for pain and suffering, however, if this was done without obligation, damages for pain and suffering will be lower than in an obligatory case situation. The financial situation of the injured person is also taken into account. What should be prevented is that the responsible person suffers severe and permanent hardship. If his/her financial situation is generally good, the compensatory function will play a minor role and the focus will be on the comfort function. If the insurance company delays settlement, this also leads to increased damages for pain and suffering 14.

13 14

OLG Stuttgart, Urteil vom 27. 8. 1987, Aktenzeichen 14 U 19/87, nicht veröffentlicht BGH, VersR 1967, 25; OLG Frankfurt am Main, DAR 1994, 21,

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Absolute liability Damages for pain and suffering can be claimed in road traffic cases of absolute liability, i.e. liability regardless of fault. Prior to the Federal Supreme Court Act, this would apply only in cases of negligence. If, for instance, injury to passengers resulting from a burst tire despite regular checking of the tire’s pressure – i.e. no negligence is involved – passengers are now entitled to claim damages for pain and suffering. An “act of God”15 is the only means by which insurance companies and car owners or drivers can exonerate themselves from this strict liability. Temporary and permanent impairment Temporary injuries influence the amount of damages for pain and suffering in the same way as does permanent damage. The longer the impairment lasts, the higher the damages for pain and suffering. Damages for pain and suffering will not be paid for a “whiplash injury” of the cervical spine without a description of complaints and a one time treatment 16. Here are some examples of awards: • € 750 for a cervical spine distortion and sprain to the left wrist. The injured person was incapacitated for work for 14 days and still had complaints after that period 17.

• € 1,500 for a person suffering from a distortion of the cervical spine and dorsal spine, as well as dysfunction of the cervical spine. The woman had been attested a 100 % impairment of the earning capacity for four weeks, 50 % impairment for another two weeks and a continued impairment for several months 18. • € 300,000 and a non-pecuniary reservation for a 54 year old woman, who after an operation of the vertebral column is now paralyzed by a transverse lesion of the cord and in permanent need of nursing and care 19. A per day compensation based on fixed rates for personal injury does not exist in Germany. Loss of expectation of life German law does not provide for a separate category for loss of expectation of life, but it is an aspect resulting in higher damages for pain and suffering 20. An accident victim dying shortly after the accident without regaining consciousness is not entitled to damages for pain and suffering. The applicable legislation does not provide for compensation for death per se, or for lower expectation of life. Non-pecuniary impairment through physical injury is not measurable as such21.

18 19

16 17

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§7 section 1 StVG: Absolute liability Section 1: If during the operation of a motor vehicle or trailer used to be towed by a motor vehicle, a person is killed or the body or health of a person is injured or the property damaged, the registered owner must compensate the injured party for the loss. Section 2: The right to damages is excluded where the accident has been caused by an “act of God”. AG Bielefeld, ZfS 1995, 372 AG Hamburg, ZfS 1991, 85

AG Bad Segenberg, ZfS 1999, 149 LG Kassel, Urteil vom 6. 4. 1998, Aktenzeichen 3 O 1409/97, Hacks/Ring/Böhm, SchmerzensgeldBeträge, 20.2595 LG Göttingen, Urteil vom 23. 10. 1991, Aktenzeichen 4 O 314/90, Hacks/Ring/Böhm, SchmerzensgeldBeträge, 25. Auflage, Lfd. Nr. 2689; LG Köln, Urteil vom 23. 10. 1996, Aktenuzeichen 25 O 314/94, Hacks/Ring/Böhm, SchmerzensgeldBeträge, 25. Auflage, Lfd. Nr. 2727; LG Stuttgart, Urteil vom 13. 7. 1993, Aktenzeichen 23 O 111/90, Hacks/Ring/Böhm, SchmerzensgeldBeträge, 25. Auflage, Lfd. Nr. 2795 Kammergericht, Urteil vom 30. 10. 2000, Aktenzeichen 12 U 5120/99, ADAJUR- Dok.Nr. 44788, NZV 2002, 38

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Spoiled holidays In a leading decision, the Federal Supreme Court ruled that an employee whose holidays have been severely spoiled is entitled to additional damages apart from futile expenses made under contract law 22. The principles of travel contract legislation are however not applied to the law of tort. Impairment or loss of holidays is not a pecuniary loss under the law of tort. Such impairment can however – to a “considerably” lower degree – be taken into account for assessment of the damages for pain and suffering. Protection of mental health: recoverable and non-recoverable loss Mental impairment, as a consequence of a brain injury or psychosomatic disorder (e.g. permanent pain) is fully recoverable under German law. This also applies to actual neuroses, i.e. neuroses caused immediately by the accident (anxiety conditions and sensation of constriction when driving a car, using a lift or diving) 23. However, in the event of a so-called “pension neurosis” (i.e. if according to its nature the damage is a substitutable cause of neurosis) there is no entitlement to compensation. This is the realization of a typical life contingency since the failure was only an accidental and substitutable cause 24. On the other hand, false “interpretation” of the accident causing subconscious compensation of latent inner conflicts, even if not in the form of a desire not to have to work any more, will entitle compensation (conversional neurosis) 25 as the features “accidental” and “substitutable” are missing. According to court rulings, the requirement for the development of conversional neuroses is a physical injury or another event of considerable importance 26.

Shock symptoms There is no compensation under German law for “normal” shock symptoms (trembling, pallor, sleep disturbance, nausea). Even being a witness of a serious accident involving family members is considered a normal life contingency. Only medically measurable mental and physical impairment can lead to damages for pain and suffering if this exceeds the degree of suffering normally experienced by any witness to an accident. Only nervous breakdowns and sleep disturbances over a longer period of time and exhaustion will give rise to damages 27. Impairment of general well-being A person whose life has been at risk can only claim damages for pain and suffering if the “normal degree of impairment” has been demonstrably exceeded. Impairment of general well-being does not give rise to compensation. In the case of a slight injury of the cervical spine, the Court held that people are subject to various impairments of their well-being and will get used to not letting them affect them permanently. Only if this threshold is crossed will there be a right to compensation 28. Coma, vegetative condition, brain damage In its leading decision of October 13, 1992, the Federal Supreme Court held that severe brain damage resulting in a grave loss of perception and sensitivity is subject to compensation. The resulting destruction of the personality is a non-pecuniary damage to be compensated in money. Impairments of this degree will require a separate assessment; merely symbolic compensation will not be sufficient 29. Here are examples of several awards:

27 22 23 24 25 26

BGH, NJW 1964, 542; NJW 1966, 1260; NJW 1980, 1974; NJW 1980, 1974 Dahlmann, DAR 1992, 325 BGH, NJW 1986, 777 BGH, NJW 1986, 777 BGH, VersR 1991, 432

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28 29

AG Saarlouis, Urteil vom 28. 11. 1996, Aktenzeichen 33 C 2406/95, ADAJUR-Dok.Nr. 29231, SP 1997, 466; OLG Frankfurt am Main, Urteil vom 10. 2. 1994, Aktenzeichen 1 U 114/90, ADAJUR-Dok.Nr. 608, R + S 1995, 258 AG Nürnberg, Urteil vom 21. 1. 1994, Hacks/Ring/Böhm, SchmerzensgeldBeträge, 25. Auflage, Nr. 12 BGH, Urteil vom 13. 10. 1992, Aktenzeichen VI ZR 201/91, ADAJUR-Dok.Nr. 5512, NJW 1993, 781

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• € 5,000 for pain and suffering, where a man died after seven days without regaining consciousness. The Court referred to Federal Supreme Court rulings in cases where the injured person died shortly after an accident without regaining consciousness. The Court refers mainly to the severity of the injuries and the period between injury and death including the comatose state 30. • € 5,000 to a 65 year old man who after five days in a coma died as a result of false treatment. Albeit subconsciously, the patient had experienced very severe and agonizing convulsions during the five-day coma. The Court was of the opinion that some degree of suffering is highly probable even when in a coma. 31 • € 25,000 to a man who died after nearly 10 months in a coma, but where it was assumed that he had suffered and felt pain 32. • € 250,000 for pain and suffering and a monthly pension of € 500, along with a non-pecuniary reservation 33, to a four-year old boy with severe cerebral trauma, initially in a coma for several weeks and suffering from severe central motor disorder of all extremities and asymmetries. He has to sit in a wheelchair all day. Despite the impairment of his mental development and speech disorder, he constantly realizes the accident-related deficits and restrictions of his way of life.

30 31 32 33

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OLG Schleswig, Urteil vom 14. 5. 1998, Aktenzeichen 7 U 87/96, DAR 1998, 354, ADAJUR- Dok.Nr. 31323 OLG Köln, Urteil vom28. 4. 1999, Aktenzeichen 5 U 15/99, VersR 2000, 974 OLG Celle, Urteil vom 19. 6. 1995, VersR 1996, 1184 OLG München, Urteil vom 20. 2. 2000, Aktenzeichen 10 U 2081/99, Hacks/Ring/Böhm, SchmerzensgeldBeträge, 25. Auflage, Nr. 1687

Lump sums, periodic payments and interim payments Under German law, most damages for pain and suffering are assessed as a whole and awarded as a single payment. In exceptional cases, a partial amount may be awarded if the case is ready for decision but a long hospitalization or considerable impairment of the capacity for work exists. In such cases, the full damages for pain and suffering can only be determined at a later stage when all consequences of the accident, their impact on the life of the injured person and the chances of recovery can be assessed 34. If permanent sequels cannot be assessed, the capital amount can be awarded up to the day of the last hearing in court. If the healing process is uncertain and there is no prognosis with regard to permanent damage or in the event of possible deterioration, the injured person will, apart from taking action for performance, i.e. payment of a capital amount, also take action for declaratory judgment that the person who caused the accident will be liable for future, currently unforeseeable damage 35. The Larger Chamber for Civil Matters of the Federal Supreme Court36 along with another court37, ruled that the following principles would apply for awarding a periodical payment for pain and suffering: “Not only the presence of unusual circumstances such as persistent pain, the necessity of repeated, painful treatment of uncertain success or the risk of future accident-related damage is a justification for awarding a pension for pain and suffering instead of one capital amount. The loss of one important limb can make the court consider awarding the payment of a pension. Because the impairment of life will constantly be renewed and is again and

34 35 36 37

KG, Urteil vom 24. 3. 1975, DAR 1975, 331 Hacks/Ring/Böhm, SchmerzensgeldBeträge, 25. Auflage, S.16 BGH, Urteil vom 6. 7. 1955, DAR 1955,276 BGH, NJW 1988, 2300

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again felt as painful so that it may be appropriate to compensate a continuous pecuniary loss through continuous monetary payments.” Pursuant to the Code of Civil Procedure, the court is free to award a periodical payment in addition to the capital amount: if awarded, the amount can be adapted in the case of a high rate of inflation, by applying for variation pursuant to § 323 of the Code of Civil Procedure 38. A “dynamic” pension cannot be awarded 39. Pecuniary loss Under German law, pecuniary loss means any loss of property that can be valuated in money. According to the “balance hypothesis”, the loss is assessed, based on the development that the property would have experienced had the loss not occurred (hypothetical development)40. This financial situation is compared to the concrete situation after the incident. For certain case groups, the result needs to be adjusted through a so-called normative evaluation (“normative loss”), for instance in cases where due to the continued payment of the salary there is no arithmetical loss. Also in cases where the loss has been reduced through efforts which generally could not be expected or where preventive measures have been taken, the party responsible for the loss should not benefit from such efforts or measures. For instance: the capacity for keeping one’s household is impaired which would normally result in costs for a household help, but the injured party attempts to do without such third-party help as far as possible or assistance is provided by family members. In such cases the loss may be calculated on a “fictitious” basis 41.

38 39 40 41

OLG Karlsruhe, Urteil vom 7. 5. 1969, NJW 1969, 1468 BGH, Urteil vom 3. 7. 1973, NJW 1973, 1653 ständige Rechtsprechung, zuletzt BGH, Urteil vom 30. 11. 1979, Aktenzeichen V ZR 214/77, NJW 1980, 775 Gerhard Küppersbusch, Ersatzansprüche bei Personenschaden, München, C. H. Beck-Verlag, 9. Auflage, 2006, S. 115)

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The following may be compensated as pecuniary loss: • impairment of earning capacity • increased needs 42 – these include all accidentrelated, recurring expenses “having the purpose of compensating the disadvantages experienced by the injured party due to the permanent impairment of his/her physical comfort” 43: – automatic transmission or other additional facilities for a car 44 – place in a sheltered workshop 45 – cost of a special diet 46 – domestic help 47 – orthopedic aids, e.g. orthopedic shoes, prostheses 48 – nursing care costs, e.g. nursing home or a professional nursing service – cost of home suitable for disabled persons 49.

43 44 45 46 47 48 49

§ 843 Absatz. 1 BGB: Wird infolge einer Verletzung des Körpers oder der Gesundheit die Erwerbsfähigkeit des Verletzen aufgehoben oder gemindert oder tritt eine Vermehrung der Bedürfnisse ein, so ist dem Verletzen durch Entrichtung einer Geldrente Schadensersatz zu leisten. KG, Beschluss vom 10. 6. 1971, Aktenzeichen 12 W 1301/71, DAR 1971,296 BGH, Urteil vom 18. 2. 1992, Aktenzeichen VI ZR 367/90, NJW-RR 1992, 792 OLG Hamm, Urteil vom 23. 8. 1990, Aktenzeichen 1 U 14/90, ZfS 1992, 195 BGH, Urteil vom 19. 5. 1981, Aktenzeichen VI ZR 108/79, NJW 1982, 757 nur im Rahmen der Eigenversorgung OLG Köln, Urteil vom 21. 3. 1989, Aktenzeichen 3 U 146/86, r + s 1989, 400 OLG Stuttgart, Urteil vom 30. 1. 1997,. Aktenzeichen 14 U 45/95, VersR 1998, 366 OLG Köln, Urteil vom 2. 8. 1991,. Aktenzeichen 11 U 277/90, VersR 1992, 506 zur Anmietung einer behindertengerechten Wohnung; OLG Frankfurt am Main, Urteil vom 22. 2. 1989,. Aktenzeichen 13 U 291/87, VersR 1990, 912 zum Einbau eines Aufzugs; BGH, Urteil vom 19. 5. 1981,. Aktenzeichen VI ZR 108/79, VersR 1982, 238, OLG Stuttgart, Urteil vom 30. 1. 1997,. Aktenzeichen 14 U 45/95, VersR 1998, 366, OLG Düsseldorf, Urteil vom 9. 5. 1994,. Aktenzeichen 1 U 87/93, DAR 1995, 159 zur Verbreiterung von Türen, Umbau des Bades, ...;

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Loss of earning capacity Impairment of earning capacity will influence the damages for pain and suffering. The longer the injuries affect the capacity for work, the higher the damages for pain and suffering. The degree of impairment of the earning capacity is an indication of the severity of the injury 50. Medical and nursing costs and other expenses If persons covered by compulsory health insurance receive private medical treatment or for instance take a single instead of a double room in a hospital, the additional expenses have to be covered by the person responsible if the injured person would also have incurred the costs without the third party’s responsibility for compensation 51. If the injured person already had private medical treatment, he/ she is entitled to compensation 52. The majority of court rulings say that medical treatment in the general treatment class is normally sufficient and that therefore there is no right to compensation of higher expenses53. Additional costs for food and meals in hospitals which are not covered by the compulsory health insurance are not subject to compensation. They are paid in replacement of expenses saved that would have been incurred at home54.

51 52 53 54

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LG Darmstadt, Urteil vom 26. 4. 1994, Aktenzeichen 10 O 408/94, Hacks/Ring/Böhm, SchmerzensgeldBeträge, 25. Auflage, Nr. 2711 BGH, VersR 1970, 129; OLG Hamm, VersR 1977, 151 LG Ravensburg, ZfS 1981, 334 OLG Nürnberg, ZfS 1983, 103; LG Detmold, ZfS 1985, 327 LG Lübeck, Urteil vom 27. 2. 1997, Aktenzeichen 12 O 208/93, ADAJUR-Dok.Nr 28356, SP 1997, 285; OLG Frankfurt am Main, Urteil vom 17. 5. 1995, Aktenzeichen 13 U 13/94, ADAJUR-Dok.Nr. 80, WJ 1995, 102

Courts held that telephone and TV rental are refundable items 55 and that the costs of a TV need only be paid if this promotes the healing process. According to another court ruling, telephone costs were not refundable in the case of a mother of a 14 year old girl who came to visit her every day 56. Costs related to the visits of close relatives are generally refundable items. Such costs must be claimed by the injured person, not by the visitors. Compensation of the cost of travel, accommodation, additional costs for meals and loss of earnings, will be subject to the medical necessity of the visits and to whether or not the expenses were unavoidable. Loss of earnings will only be refunded if the loss cannot be compensated by working before or after the visit 57. The cost of treatment abroad will only be paid if there are no competent and experienced physicians available near the place of residence of the injured person 58. Additional costs for the treatment of especially complicated accident injuries abroad must be paid if medically advisable because a consultant abroad has a new method of treatment which is not available locally 59, or if the same treatment in Germany has been unsuccessful 60.

55 56 57

58 59 60

AG Offenburg, Urteil vom 14. 2. 1995, Aktenzeichen 3 C 189/94, ADAJUR-Dok.Nr. 27511, ZfS 1995, 252 OLG Düsseldorf, Urteil vom 19. 11. 1993, Aktenzeichen 22 U 135/93, ADAJUR-Dok.Nr. 16513, VersR 1995, 584; BGH, Urteil vom 19. 2. 1001, Aktenzeichen VI ZR 171/90, ADAJUR-Dok.Nr. 1413, DAR 1991, 220; OLG Karlsruhe, Urteil vom 11. 7. 1997, Aktenzeichen 10 U 15/97, ADAJUR-Dok.Nr. 31992, NZV 1999, 210 BGH, VersR 1969, 1040 OLG Hamburg, VersR 1988, 858 BGH, VersR 1969, 1040

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Inability to keep the household Personal injury includes damage caused by a person’s inability to keep the household at all and/or not in the previous way. A book exists to help with the calculation/assessment 61. The computer-based calculation is based on the “Hohenheimer Verfahren” 62. Outlook for medical assessment in Europe Different national systems for the assessment of non-pecuniary loss may result in considerable differences as to the amount of damages awarded. The schematization of injuries at least promises a certain level of harmonization across the EU. There is, however, still the issue of the medical experts’ competence and independence, and the differences between the respective social systems. It is important that the consideration of the individual case and circumstances has precedence over schematization, that amounts awarded for one point may differ from country to country, and that the discretionary powers of the courts are ensured to give the judge room to maneuver not only where severe injuries are concerned. Rather than an EU schematized compensation solution using a point system for individual injuries, a more effective harmonization would be in respect of the assessment guidelines, which would ensure, for example, that an expertise prepared in Germany is also recognized in France or Italy.

Schulz-Borck/Hofmann, Schadenersatz bei Ausfall von Hausfrauen und Müttern im Haushalt mit Berechnungstabellen, 6. Auflage, Verlag Versicherungswirtschaft Karlsruhe, ISBN 3-88487-894-8 Information available from: ADAC e.V., Juristische Zentrale, Am Westpark 8, D-81373 München

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A Changing Legal Landscape in England and Wales David Wilkinson and Nick Quarrie, Dewey & LeBoeuf

David Wilkinson is a Lawyer and Partner at Dewey & LeBoeuf, a leading international law firm. Known for its litigation and regulatory advice, the firm is one of the leading legal advisers acting for insurers and reinsurers across Europe and worldwide. In this article, David Wilkinson and colleague Nick Quarrie describe how personal injury damages are assessed and the latest related U.K. legislative reforms. The reforms include revised payment and funding methods for damage awards, provisions to prevent the “fear of being sued” from stifling everyday life and the regulation of claims management companies. All these changes have been made to achieve a fair, flexible and manageable compensation system.

Introduction The law on damages, in particular compensatory damages, for personal injury is very much a live issue in England and Wales. Not only is it the focus of much attention at the moment, it has also undergone plenty of change over the past 10 to 15 years. The late 1990s and early 2000s saw substantial reforms of different aspects of the law on damages, much of which were precipitated by the Law Commission’s findings as published in a series of reports during the 1990s. For example, a 1994 report 1 by the Commission on structured settlements led to the U.K. Government implementing provisions to allow the courts to order damages for future pecuniary loss to be paid wholly or in part by way of a series of payments, rather than by a lump sum. This was a notable development and will be elaborated on below. Other reports by the Commission include those focusing on claims for wrongful death 2, liability for psychiatric illness 3, and damages for personal injury 4. Legislation has been enacted to contribute to the evolution of this area of the law. For example, the Damages Act 1996, which permitted the Court to make an order that damages were wholly or partly to take the form of periodic payments; the Courts Act 2003, which strengthened the Court’s powers in this regard; and the Compensation Act 2006, which contains regulations dealing with claims intermediaries.

1 2 3 4

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Civil law damage awards for personal injury Background The main aim of a civil law award of damages is to compensate a claimant for damage, loss or injury suffered as a result of the act or omission by another (the defendant). The purpose of these damages is, so far as is possible, to put the claimant in the same position as he or she would have been but for the injury, loss or damage suffered. Tort law has an important role to play in enabling people to assert their (legal) rights against those who have caused harm and loss, principally through an award of compensatory damages. By imposing liability on and awarding damages against tortfeasors, the law encourages acceptance of general principles such as the “duty of reasonable care”. Of course, the courts must balance this duty with a similar duty on individuals to take reasonable care of their own safety and to take reasonable steps to reduce the cost or likelihood of damage that others may cause them. Because of the complexity of these issues and the fact that every personal injury case will differ at least slightly, they are largely governed by common law; the flexibility of the courts in deciding such cases is preferable to rigid legislation.

LC 224 (Cm 2646) Structured Settlements Law Com No. 263 Law Com No. 249 Law Com No. 262

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Damages are a means of ensuring that the burden of costs generated by an unlawful act or omission are borne by the negligent party responsible for the act or omission, rather than the injured party or the taxpayer. In this sense, awards of damages represent a re-distribution of the costs generated by negligence, rather than a punitive measure. In practice, most awards of damages for personal injuries are met by the culpable partyâ&#x20AC;&#x2122;s liability insurers. In civil proceedings, the possibility of going beyond purely compensatory damages is limited5. The U.K. Governmentâ&#x20AC;&#x2122;s view is that this should remain the case, as any element of punishment is more suited to the criminal law. This enforces the view that the main aim of the civil law should be to provide compensation for loss, not to punish the defendant. In other words, the claimant should be awarded damages to put him in the same position as he would have been had the damage or loss not been suffered: no more, no less. Assessing damages Assessing damages is perhaps the most problematic aspect of this area of the law. Not only is it a difficult task to decide on the level of damages in any one case, it is also difficult to decide on the best way that such damages should be paid to a successful claimant. Damages awarded in personal injury cases can be divided into two different types: general and special. Special damages are actual pecuniary losses suffered by the claimant, as a result of the wrongful act of the defendant, up to the date of trial. General damages are losses which cannot be quantified exactly, such as future pecuniary loss and all (past and future) non-pecuniary loss. Examples of general damages are for loss of future earnings as well as more abstract concepts such as pain, suffering and loss of amenity.

The court must balance the interests of claimants and defendants. Another consideration is insurance as increasing levels of compensation have an effect on the affordability of insurance. The U.K. Government cites that central principles should apply none the less: claimants with valid claims should be entitled to appropriate financial redress to meet their requirements and the responsibility for this financial compensation should fall to the party that has caused the injury. It is for this reason, and the fact that the evolution of this area of the law is best suited to common law (whereby court decisions are based on precedent), that the Government believes that legislation and procedural change should only be implemented where there are positive identifiable benefits. This leaves the courts with the requisite flexibility to consider whether damages should be awarded on a case by case basis, as well as the amount of those damages. Method of payment As well as having to decide on the amount of the award, the courts now have the freedom (and responsibility) to decide how payments to successful claimants are to be made. Several methods are available.

In very limited circumstances the court may make an award of aggravated damages.

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Much of the recent development in the law and many of the recent cases have been concerned with the quantification of damages awards. Assessing an appropriate level of damages is always a difficult task for the courts. Faced with arguments that awards are becoming too high, the courts have to balance the needs of an often badly incapacitated claimant faced with rising prices, salary inflation and improved but more expensive treatment. In light of all this, it is not surprising that figures claimed, in lump sum terms, are on the rise. However this should not preclude an individual with a valid claim from obtaining the compensation they actually require.

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Lump sum Historically, compensatory damages were paid by means of a lump sum awarded on judgment. While this afforded claimants some amount of security in the short term, more often than not it would lead to over-compensation or under-compensation. This would result in either a windfall for a claimant’s family (at the defendant’s expense) if a claimant died earlier than expected, or the more unfortunate scenario where a claimant’s funds were exhausted prematurely, being forced to depend on the State for living and maintenance costs. Much of the recent development has been seeking to remedy this problem. Provisional damages An award of provisional damages in a personal injury claim has two elements; first, damages for existing injuries and second, the right to return to court to apply for further damages if the claimant suffers serious deterioration in the future as a result of the original injury6. Structured settlement Another method used to ensure that claimants were protected against the risk that their damages might be exhausted, is the structured settlement. A defendant or its insurer would purchase an annuity out of, and at the same time as, an agreed payment of compensation. The result of this was that the claimant received the annual payments from the annuity and they were tax free. The first structured settlement was agreed in 1989 and the payment to the claimant in that instance was a combination of a lump sum and regular tax free annuity payments for life. While structured settlements continued to develop, a major restriction on their use was that they required the agreement of both parties. Somewhat perversely it was often the claimant (or the claimant’s family) who was reluctant to agree to a structured settlement preferring, instead, the conventional lump sum award.

Periodical payments The Damages Act 19967 gave courts the power to make an order that damages could be paid, wholly or partly, in the form of periodical payments. Still, there remained the constraint that both parties had to consent to this method. Following criticism by the courts, including the House of Lords8, and after the Master of the Rolls’ Working Party’s Report in 2002 on structured settlements, the 1996 Act was amended. The amendments were implemented by the Courts Act 2003, and since April 1, 2005 the courts have had the power to order periodical payments whether or not the parties agree. Further, it is now mandatory when making an award of damages for future pecuniary loss in cases of personal injury, for the courts to consider whether the damages, or at least part of them, should be paid by way of periodical payments. Periodical payments have many advantages over lump sum awards. Most importantly, they guarantee a successful claimant regular annual payments for the rest of his life, removing any fear of exhausting a lump sum. Periodical payments also shift the burden of the risk associated with investing a lump sum away from the claimant and on to the defendant or insurer. This in itself can remove a lot of the stress involved with managing a lump sum, while ensuring that future needs are provided for. Other amendments to the Damages Act 1996 provide for uplifts to annual payments to account for inflation. As long as the Retail Price Index (RPI) reflects real increases in the claimant’s annual costs, the claimant will be protected against rising costs in the future. Conversely, if a link to RPI does not cater for real increases in costs, the claimant will be at a loss, year after year. He will also have no means of protecting himself against the ongoing shortfalls. This had led to a fair amount of debate; developments include using different bases for annual uplifts in periodical payment awards. One problem that has been identified is that the increase year on year in the cost of care has 7 8

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See Civil Procedure Rules, Part 41

See section 2 (1) Wells vs. Wells [1999] 1 AC 345; see for example Lord Steyn at 384.

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tended to be higher in percentage terms than the RPI. Hence recent case law has focused on different kinds of indexation which could be used to ensure that awards in personal injury cases actually provide full compensation to claimants. A useful discussion of this subject is to be found in the judgment of Mrs. Justice Swift in Thompstone vs. Tameside & Glossop Acute Services NHS Trust 9. The lump sums for most of the heads of damage had been approved already; by the time of the hearing, a global sum had also been agreed by the parties for future loss of earnings and educational costs. This hearing was to decide which index the cost of future care should be linked to and which method of payment should be used. The defendant sought to provide damages for future care on a lump sum basis; the claimant sought an order for periodical payments. Historically, periodical payments were indexed by reference to the RPI and this is what the defendant in this case submitted should be followed. However, the claimant proposed that one of the following three measures would provide a more appropriate basis for calculating the payments. • Average Earnings Index (AEI) • ASHE (The Annual Survey of Hours and Earnings) 50 (median) • ASHE 80 (6115) The latter two are reported as levels, rather than indices: ASHE is a median figure, using data from all occupations; ASHE 80 is based only on the occupational earnings for care assistants and home care providers.

[2006] EWHC 2904 (QB)

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The Court found that the cost of care had outstripped the RPI in the recent past. Indeed, an example cited showed that the difference was about 25 % during the period 1992–2004 10. This has the obvious effect of leaving claimants to struggle with less than they should have. After a lengthy investigation into the relative merits of each basis, the Court held that periodical payments linked to ASHE 80 gave the mechanism that would “best meet the Claimant’s needs” 11. The defendant appealed, but the decision was upheld in the Court of Appeal judgment dated January 17, 2008. Although more expensive for the defendant, it should be remembered that this link did not apply to the damages in toto; as the hearing related solely to the costs of future care this was a logical decision. This may mean that the judgment is of limited application. Another tool used in quantification is the publication known as the Ogden tables, prepared by an interdisciplinary working party of actuaries, lawyers, accountants and other interested parties. Named after Sir Michael Ogden QC who originally chaired the working party, these are actuarial tables (with explanatory notes) which are designed to assist in the calculation of future pecuniary losses, so as to provide a present capital value of future annual losses. The tables set out multipliers based on complex financial calculations, social research and various assumptions. Various examples are given but the appropriate tables for any case are chosen depending on the period of loss or expense the claimant is to be compensated for, and the sex of the claimant. The period of loss will often be an expert’s opinion of the life expectancy of the claimant. The appropriate multiplier is then applied to the appropriate “multiplicand” – the annual sum that the claimant would have expected to earn or is estimated to need.

10 11

[2006] EWHC 2904, at para. 97 [2006] EWHC 2904, at para. 150

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Funding and cultural issues In 2000, the Access to Justice reforms and the abolition of legal aid for personal injury cases changed the way in which personal injury claims could be funded. The burden was shifted from the public purse to the private sector and therefore different means of funding claims developed. Conditional fee arrangements & after the event insurance One area of growth was the use of Conditional Fee Arrangements (CFAs). CFAs were introduced by the Courts and Legal Services Act 1990; they are often misleadingly called “no win, no fee” agreements. A CFA is an agreement between a lawyer and his client that part or all of the client’s legal bill would be payable only in the event of the claim being successful. What CFAs do not cover are costs awarded against an unsuccessful claimant. This led to a further development and a new product – after the event (ATE) insurance. For a certain premium, potential claimants could insure against losing their case by taking out ATE insurance and in the event that their claim was unsuccessful, the insurance would cover any other costs, such as those awarded to the defendant and the claimant’s own disbursements. The claims management company At the center of the growth of CFAs and ATE insurance was another phenomenon which was also growing rapidly: the Claims Management Company (CMC). Although there were a few CMCs before 2000, the abolition of legal aid for personal injury cases and the consequent shift of funding from the public to the private sector created an opportunity for rapid growth in claims “farmers”. This growth was also helped by the slow response of solicitors’ firms to capitalize on the new market opportunities. While it cannot be denied that when they first appeared, CMCs helped many consumers achieve access to justice where otherwise they might have had neither the means nor the knowledge to do so, CMCs soon

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gained a reputation for sharp practice. Not only were they seen to be cynically encouraging spurious claims, but often their clients were left with little money at the end of the process. Ultimately the whole sector got a very bad press and this peaked in the collapse of the two market leaders. Many lawyers saw this as a sign that the U.K. Government’s poorly conceived funding scheme was not working as a replacement for legal aid. The very people who the reforms were meant to be helping and protecting were being failed by the system. Everything pointed to a need for regulation of CMCs. In May 2004, the Better Regulation Task Force (BRTF) published its findings on the sector in its report “Better Routes to Redress”. During its consultation process, the BRTF had found that CMCs emerged as an issue repeatedly with calls for the Government to regulate the sector. Later in 2004, the Citizens Advice Bureau published a report into CMCs which also described unethical practices and a need for regulation. The Government took note and the result was the Compensation Act 2006, which put in place a regulatory regime for the claims management sector. The Compensation Act 2006 The legislation was fuelled by a popular view that the U.K. was falling prey to the propensity to sue that is so prevalent in the U.S. The British media would seize on large awards and decry the “compensation culture”. The BRTF criticized this strongly in its May 2004 report 12. The BRTF found that the right of an individual who has suffered an injustice to seek redress against the wrongdoer was being undermined by misinformation and spurious claims. Unscrupulous CMCs had to share the blame as they were responsible for encouraging people to advance dubious claims and consequently tainting the integrity of bona fide claimants. Despite this perception, the BRTF actually found that there was no real evidence of a “compensation culture”.

“Better Routes to Redress”.

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Notwithstanding increased access to justice since the millennium, evidence suggested that the number of claims in fact had not risen. Nevertheless, in March 2005 Lord Falconer disagreed with that conclusion and took the widely held public view, encouraged by the media, that a fear of being sued (with consequent increase in insurance premiums) would stifle every day life from the school trip to the willingness of volunteers to help organizations. The upshot was the announcement of the Compensation Bill in November 2005, closely followed by the Compensation Act 2006 which came into force at the end of July of last year. It contained provisions on three main aspects: • the law of negligence and breach of statutory duty • damages for mesothelioma • the regulation of claims management services. The first aspect is aimed squarely at tackling the perceived “compensation culture”, by allowing the courts to consider the deterrent effect of imposing liability in certain circumstances. When judging what is a reasonable standard of care in the context of a claim in negligence or for breach of a statutory duty, courts can now consider whether the imposition of a certain standard of care would restrict certain activities which are worth pursuing from a social standpoint. This has been coined “the scout-master defense”, for obvious reasons. This part of the Act also provides that an apology, offer of treatment or other redress shall not constitute an admission of liability in a claim of negligence or breach of statutory duty.

The second aspect mentioned above has a very specific effect: it imposes 100 % joint and several liability on all responsible persons where an individual has contracted mesothelioma as a result of being negligently (or in breach of statutory duty) exposed to asbestos. This is so victims can receive full compensation from any negligent party and speeds up the process. The negligent party can then seek contributions from other negligent parties, if appropriate. This part of the Act essentially reverses a House of Lords’ ruling limiting compensation in such cases 13. The third and main part of the Act sets out requirements for CMCs: that they give consumers clear advice about the validity of claims, options for funding the costs of the claim, and put in place a complaints mechanism for the consumer if things go wrong. The regulatory regime covers the whole process of claims management, from the taking on of business, the management of claims, insurance, loan finance, the handling of client money and client complaints. More specifically, cold calling in person is prohibited, referral fees must be disclosed and certain information must be given to clients before they sign a contract. There is a 14 day cooling off period after a contract has been signed and there must be an internal complaints procedure. With effect from April 23, 2007, all CMCs are regulated by the Department for Constitutional Affairs (DCA). Anyone offering claims management services without authorization will be committing an offence and will be liable for up two years imprisonment or a fine or both. Once authorized, companies will have to comply with strict rules of conduct. If an authorized person fails to comply, the regulator can take disciplinary action. For now, the Secretary of State for Constitutional Affairs is the regulator.

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Barker vs. Corus (UK) plc (formerly Saint Gobain Pipelines plc) and other appeals [2006] 3 All ER 785

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Ongoing legal reforms As this article is being prepared, the DCA is collating responses to its latest consultation paper “The Law on Damages” 14. This confronts many of the issues raised by the Law Commission’s series of reports in the 1990s and views have been sought from all parties involved in civil claims in England and Wales. It remains to be seen whether or not the report leads to further developments in the law. The Corporate Manslaughter and Corporate Homicide Act received Royal Assent on July 26, 2007 after a very lengthy evolution. The Act creates the new offences of corporate manslaughter in England, Wales and Northern Ireland and corporate homicide in Scotland. Previously, it has been necessary (and nigh on impossible) to prove that a senior official within a corporation was the “directing mind” responsible for the death. Now liability can be imposed on the body corporate itself if a person’s death is caused by a gross breach of a duty of care by the senior management. The Act does not impose liability on individuals within a corporation, although this remains a possibility under the common law of manslaughter. The Act came into force on April 6, 2008. Increased emphasis on rehabilitation Whilst prevention is better than cure, personal injury claims will never disappear. Approaches to treatment and care are also evolving to improve the standard of life of injured people. One of the more notable developments in recent years is the increased emphasis on rehabilitation. The provision of rehabilitative support promptly after an injury and on an ongoing basis was one of the main recommendations of the BRTF in its 2004 report. Not only can rehabilitation improve an individual’s quality of life by lessening pain and discomfort, but it can ultimately smooth the path to returning to work where otherwise the injured person may not have been able to do so. One suggestion mooted

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DCA Consultation Paper CP 9/07, 04/05/2007

by the DCA in its latest consultation paper 15 is that the defendant pays the capital cost of modifying accommodation prior to trial but receives a charge over the property for the amount paid. This could be returned to the defendant when the claimant dies or no longer requires the property (assuming the claimant does not surpass the amount with damages actually awarded). This is a significant departure from the traditional modus operandi, and whilst the gesture of paying “up front” may be attractive, it is unlikely to offset the negative image of subsequent enforcement of a charge over the property. It is only a suggestion at this stage. Conclusion The law insofar as it relates to the practice and procedure of personal injury claims has come a long way in the last 20 years. In the more serious, catastrophic cases the conventional lump sum award has, in many cases, been replaced with the periodical payment. Lawyers who act for claimants are no longer funded by the taxpayer; they share the risk with the claimant in return for an enhanced payment in the event of success. A new class of insurance business has emerged to protect the claimant against contingent liabilities and the excesses of the claims farmers have been curtailed. The emphasis now is on rehabilitation of accident victims to reduce the level of awards, as well as to assimilate victims into a relatively comfortable life and, so far as is possible, back into the workplace. It is difficult to be too critical of these reforms.

ibid.

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Israel Compensates for Lost Future Earnings Stephan Schrecke, PartnerRe

Stephan Schrecke, underwriter for property and casualty business at PartnerRe, discusses how a new precedent by the Israeli Supreme Court has created an additional bodily injury indemnity component for lost future earnings. This change, which also applies to minors, is expected to increase the compensation awarded in cases where the injured person is under the age of retirement. Upward reserve adjustments have already ensued.

Introduction On March 15, 2004, the Israeli Supreme Court reversed a previous binding precedent rendered by the Supreme Court almost 20 years ago. The new precedent recognizes an indemnity claim for heirs and the estate of victims against the defendant, if the injury or death as a result of the defendant’s negligence shortens the victim’s working life and thus future earning capacity. The period by which the injury has prematurely shortened the plaintiff’s pre-accident life expectancy is referred to as the “lost years”. The ruling applies to all pre-retirement victims, including those not yet working, i.e. minors or students. Before this change, only a victim’s immediate dependents could claim for nonincurred damages for loss of future earnings, and only a nominal amount for pain and suffering was available to non-dependent heirs, such as the parents of minors. This new indemnity increases the exposure in motor and casualty bodily injury cases in Israel. If the plaintiff is still alive, mortality tables will be used to confirm the plaintiff’s pre-accident life expectancy to evaluate the lost years. Medical evidence will be used to estimate how this life expectancy has changed as a result of the plaintiff’s injuries, and information from official Israeli statistics and the plaintiff’s evidence will help the finder of fact to determine when the plaintiff would have retired under normal circumstances. Once the number of lost years is evaluated, salary information is applied and the total lost income discounted to take into account the time value of money.

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This article will focus on the impact of this legal amendment to bodily injury insurances. A new legal precedent Indemnities paid by insurers are generally considered to be split between economic losses and immaterial losses. Until 2004, Israeli law said that no amounts could be recovered by or on behalf of plaintiffs whose lifespan had been shortened, or who had died, as a result of an accident prior to retirement for the prospective loss of earnings in the lost years of employment; in the case of a child’s death in an accident, for example, only immaterial losses were considered. With the “lost years” rules, the Israeli Supreme Court is recognizing that an accident which reduces life expectancy to before the theoretical expected retirement date, generates an economic loss for the heirs of the victim in terms of savings capacity and transferred heritage. Even if a person is not yet receiving any income from his/her work, a child for instance, he/she still has an economic asset which is the average capacity of estate which should have been received by his/her heirs. The new precedent followed the case of a minor who fell into an unfenced archaeological pit dug in the old city of Jerusalem. The Jerusalem District Court rejected the claim of the family for compensation in respect of loss of earnings during the lost years. The Court based its decision on the binding precedent of older cases. The plaintiffs appealed to the Supreme Court. In a detailed and revolutionary decision, the five justice panel of the Supreme Court accepted the appeal, thereby in effect creating a new claim for indemnity. The new Israeli Supreme Court precedent recognized the right of the insured person (or the estate in

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case of a fatal accident) to be compensated for loss of earnings also during the lost years regardless of whether the injured person remained alive with a shortened life expectancy, or died as a result of the wrongful act. Following a thorough comparative research of other common law countries, the Court based its decision on the view that the earning ability of the injured person should be regarded as one of his assets, which was damaged by the responsible party’s wrongdoing and hence should be compensated. The Supreme Court made two conditions to the general rule: • Deduction of personal living expenses: the amount of compensation paid to the injured person or his estate should be decreased to reflect the amount of personal living expenditures that would have incurred. • In cases where the claimants are the heirs of a deceased and also entitled to compensation as dependents of the deceased, they can not claim double compensation. The new precedent is expected to substantially increase the compensation awarded in bodily injury claims where the injured person is under the age of retirement.

In April 2006, the Supreme Court delivered its ruling for the calculation of compensation for loss of prospective earnings during the lost years. The calculation method is a so called “portion system”, where one portion is reduced because of death. The income of any individual can be allocated to different uses, i.e. general living expenses, personal expenses for each family member and savings. For a single person (adult or minor) the lost years revenue which would have been allocated to savings is fixed at a third of that person’s salary at the time of death until the pre-accident expected retirement date. If the salary amount is not known, the income taken into account for the calculation is the national average salary (US$ 1,750 per month). The national average salary is used for all cases involving minors, applied from when that person would have started work (aged 21) until his or her retirement (aged 67). As compensation is awarded as a lump sum payment, the estimated income is discounted to present value. To assess the financial impact of this change, we consider three different scenarios in the case of a death: the deceased is a minor (scenario 1), the deceased is an adult with no dependents (scenario 2), and the deceased is an adult with dependents (scenario 3).

Insurance and reinsurance implications Before the ruling, the victim’s family could receive compensation for immaterial loss only, i.e. “pain and suffering” up to US$ 11,700 (NIS 50,000) calculated by the courts.

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Scenario 1: minor Income benefits are payable on a present value basis using an interest rate of 2.5 %, according to the current (time of writing) economic market situation. Based on the Supreme Court Decision, for minors the calculation begins with the present value of all the income that would have been received between the ages of 21 and 67. The total income value is then discounted again to the time of the victim’s death. We can write the lost years formula as follows:

Discount Lost Years =

k 22 (1 + i )

(1 + i )

21− a

where

Example: If a victim is aged 5 at the time of death, the lost years component would be US$ 115,500 (NIS 493,877):

Lost Years =

(1 + 2.5% )

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Lost Years = Discount

k = a +1 (1 + i )

k−a

where

S k is the yearly salary i is the interest rate a is the age of death

Example: If a victim is aged 37 at time of death, earning US$ 1,750 a month, the lost years component would be US$ 132,200 (NIS 565,118):

Lost Years = 30%

1,750*12

k 38 (1 + 2.5% )

k − 37

1,750*12

k 22 (1 + 2.5% )

PartnerRe 2008 Bodily Injury: Viewpoints for Europe

We can write the lost years formula as follows:

k − 21

S k is the yearly salary i is the interest rate a is the age of death

30%

Scenario 2: adult with no dependents Income benefits are payable on a present value basis using an interest rate of 2.5 %. The income that would have been received from the time of the victim’s death to the age of 67 is discounted to the time of the death.

k − 21

21− 5

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Scenario 3: adult with dependents The total economic benefits after lost years’ jurisprudence payable for adults with dependents are based on the income at the time of death and on the number of dependents (or “shares”). As before, if the income amount is not known, the income taken into account in the calculation is the average salary in the market. The number of shares approach usually considers one share per family member, one share for the house and family general expenses, and one share for savings. The income is then apportioned without the share of the deceased.

Example: If the victim is aged 37 at time of death, earning US$ 1,750 a month and married with two children, the lost years component would be US$ 367,200 (NIS 1,569,772):

Income benefits are payable on a present value basis using an interest rate of 2.5 %. The income that would have been received from the time of the victim’s death to an age of 67 years is discounted to the time of death. This ratio is calculated as follows:

Previously, the amount would have been US$ 352,500 (NIS 1,506,981):

Discount

number of dependents 2 number of dependents 3

where

+ 2 represents the share for the house and family expenses and the share of the savings + 3 represents the above and the share of the deceased

Prior to the lost years ruling, the discount ratio did not take into account the saving share.

Lost Years = 3 + 2

3+3

1,750*12

k = 38 (1+2.5%)

k − 37

S k is the yearly salary i the interest rate Where corresponds to the wife/husband and a is the3age of death

the two children.

Before Lost Years = 3 + 1

3+2

1,750*12

k = 38 (1+2.5%)

k − 37

S k is the yearly salary i the interest rate a is the age of death

In this case, the additional loss amount due to the new ruling is US$ 14,700 (NIS 62,791). We can see that it is the cases of young victims without dependents (scenarios 1 and 2) which will generate most of the additional costs for the insurance industry. Based on the same kind of analysis, a recent study from the Insurance Services Office of Israel has shown that the expected overall impact to the market will be an increase of 5 % on the total current incurred value.

We can write the lost years formula as follows:

Lost Years = Discount

k = a +1 (1 + i )

k−a

where

S k is the yearly salary i is the interest rate a is the age of death

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Conclusion Considering the small amount previously distributed to a family in respect of pain and suffering after the death of a child, the Israeli Supreme Court has created an indemnity component to the family linked to the heritage that an average person leaves to their family on dying. This notion of “lost years” has been extended to indemnify any person that dies as a consequence of third-party negligence. Israeli insurance companies calculated the additional exposure for motor bodily injury claims related to the new ruling and came to the conclusion that the ruling has an impact on their reserve positions of previous years.

It is important to carefully monitor the development of open cases, as this limited amount of business could create run-off issues. Nevertheless, the Supreme Court has clearly defined that closed claims cannot be reopened to take the new ruling into account. After a portfolio review, we observed that most insurance companies have adjusted reserves on their “lost years” cases and have a good overview of the issue. Points to watch in the future include increases in average salary, interest rates, retentions and changes by the Legislator, which could all increase the impact of this precedent, in particular for run-off situations.

In general, reinsurance motor treaties will be only moderately impacted by the change due to the high average market deductible. In addition, the indemnity can be sufficiently well evaluated for motor claims and thus adequately built into reinsurance pricing. Large loss scenarios can be evaluated under the new law and cost increases can be well assessed. However, the consequence to other third-party liability reinsurance covers could be much higher, since salaries are capped at three times the average salary in Israel on motor treaties, whereas this cap does not exist for other liability covers.

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Medical Aspects

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26.6.2008 19:48:31 Uhr

The medical profession takes center stage in the assessment and treatment of bodily injury. With medical progress affecting patient recovery and bodily injury costs, this chapter begins with a look at how spinal surgery is progressing. This is followed by an article that considers the need for objective medical assessment based on the example of variable minor cervical trauma injury claims experience. Remaining with the topic of assessment, the final article reviews the official EU solution for doctors to assess non-economic damages.

page

Advances in Spinal Surgery Advances in spinal surgery have led to a reduction of post-operative pain and functional impairment, and to faster recovery times. With new implants and operative techniques, the affected area can be stabilized to such an extent that rehabilitation can begin almost immediately after surgery. Future improvements are anticipated particularly in the areas of navigation systems, materials to substitute tissue and promote fracture healing, and in paralysis therapy medication.

Studying Minor Cervical Trauma Injuries The results of a study of European minor cervical trauma claims suggest that sharply contrasting national loss experiences relate more to cultural approach than to medico-legal issues alone. Recommendations include the need for specialized medical training and objective assessment methodologies based on multidisciplinary cooperation.

A Scale Guide for Non-economic Bodily Injury Damages Since January 1, 2006, this has been the official scale for civil servants working in the EU. It provides a clinical approach to assessing the aftereffects of an accident and the objective consequences that these have on daily life. It enables standardization, whilst remaining adaptable to the case in question and to the specific economic environment.

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26.6.2008 18:16:21 Uhr

Advances in Spinal Surgery Dr. Rudolf Beisse, University of Utah, BG Unfallklinik Murnau

Dr. Rudolf Beisse is Assistant Professor of Neurosurgery at the University of Utah in the U.S. and Deputy Medical Director and Head of Surgery at the Murnau Trauma Center in Germany. His article offers an expertâ&#x20AC;&#x2122;s insight into the advances in spinal surgery over the past decade which have led to a reduction of post-operative pain and functional impairment, and to faster recovery times. With new implants and operative techniques, the affected area can now be stabilized to such an extent that rehabilitation can begin almost immediately after surgery. Future improvements are anticipated particularly in the areas of navigation systems, materials to substitute tissue and promote fracture healing, and in paralysis therapy medication.

Introduction Accidents at high speed may cause serious injuries to the spine. Approximately 6,000 severe injuries to the spine occur in Germany every year. In addition to people involved in traffic and occupational accidents, the incidence of which is declining, those who practice high-risk sports and motorcyclists are the main groups who suffer spinal injury. The complex destruction of intervertebral discs and vertebrae leads to an extremely unstable situation in which any strain on or contortion of the spinal column may cause a shift in the vertebrae or, in the worst case, to damage of the nerves or the spinal cord (figure 1). About 20% of victims of severe spinal injury suffer from partial or complete paralysis. Therefore, treatment is aimed at restoring stability, load-bearing capacity and form to the Figure 1 Very severe spinal injury as a result of a traffic accident.

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vertebral column as rapidly as possible. As a rule, this can only be achieved by surgery in cases with such unstable injuries. Stabilization used to be achieved by anchoring the damaged area with screws and rods to the healthy vertebrae above and below, but the unavoidable consequence was the creation of large entry routes for the implants. This caused corresponding damage to the muscles and stiffening of a whole segment of the spine had to be taken into consideration. During the last 10 years considerable progress has been made in the treatment of the injured. Anatomy and typical injury patterns With the exception of the two upper cervical vertebrae, all vertebrae forming the spinal column have a ventral vertebral body from which two dorsally facing arches of bone arise enclosing the spinal cord. In the case of injury the vertebral body is usually shattered, whereby the dorsal parts together with the back wall of the vertebral body are sometimes displaced into the vertebral canal. Depending on the extent of the displacement of the vertebral canal, paralysis may result as a consequence of compression of the spinal cord or the nerve fascicles therein. If the spinal cord can be relieved of pressure within a very short period of time, the nerves may recover their normal function. The spinal column may be ruptured in less frequent cases, which may also affect the spinal cord.

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Stabilization of the spinal column Access routes to the spinal column are different, depending on the region affected. Therefore, operations to the cervical vertebrae are normally carried out from the front. This route is gentle because, apart from the skin, no structures have to be cut transversely to gain access to the cervical vertebrae. The ruptured parts of the ventral vertebral body and the intervertebral discs are removed and replaced by a solid body made of bone, titanium or plastic in order to restore the form and stability of the spine. A flat titanium plate anchored from the front to the vertebrae located above and below bridges and stabilizes the damaged segment until the bone finally heals. Some injuries to the cervical vertebral column, especially the upper segments, are preferably operated from behind with the patient lying face down (dorsal entry). For this purpose the powerful nape muscles must be partly detached. Today it is also possible to bridge the injured area rapidly in such cases by using new implants and by applying modern operative techniques, including navigation systems. This makes it possible to avoid stiffening from the back of the head down to the cervical vertebrae, which frequently occurred in the past. Using the dorsal entry route we are able to anchor screws onto the strong vertebral arches and bodies of the thoracic and lumbar vertebrae. In this case too it is no longer necessary to expose large areas of the spinal column in every case. The screws and connecting elements are inserted through the smallest possible skin incisions and assembled under the skin and musculature. The spinal fracture can then be aligned and initially stabilized by shifting the screws on the connecting rods and altering the angle of the screws.

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Restoration of the load-bearing capacity Four-fifths of human body weight is supported by the ventrally (front) located vertebral bodies. If one or more vertebrae are destroyed as a result of injury, operative reconstruction is necessary. The damaged parts of the vertebral body are removed and replaced. Conventional techniques required an extensive opening of the thorax or abdominal cavity, often of both body cavities. This route of access to the spinal column was considered the most difficult intervention, putting great strain on patients who frequently suffered pain and functional impairment long after the operation. Therefore, an obvious priority was to develop and introduce an endoscopic procedure to treat spinal injuries. Endoscopic procedures on the spinal column The principle is based on the use of four plastic portals that are introduced into the thorax after an incision of 1.5 to 2 cm between the ribs in each case. A high-resolution camera permitting the entire operation inside the body to be displayed on two monitors in the operating room is inserted through one of the portals. The other three portals are used to gently introduce surgical instruments such as an ultrasonic meter (figure 2, next page). In order to optimize the overview in the thoracic cavity, respiration in the lung on the affected side is suspended for the duration of the operation. The rigid rib cage serves as a natural operation space during the intervention so that the procedure can be carried out without the use of gas to create overpressure. The damaged parts of the vertebral body can be removed using specially developed forceps, high frequency fraises and punches. In many cases the force of the accident may cause partial or complete displacement of the vertebral canal, resulting in paralysis and impairment of nerve function. It is now possible to use endoscopic methods to remove bone fragments gently from the vertebral canal and thus to relieve the spinal cord and establish the best possible conditions to achieve the desired reversal of paralysis and insensitivity.

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Figure 2 Arrangement of portals and instruments for an endoscopic spinal column operation.

Figure 3 Insertion of a bone graft (clamp) in the injured vertebra.

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A titanium lattice filled with endogenous bony substance or a bone clamp is inserted into the injured area of the spinal column to replace the damaged vertebra and intervertebral discs. A specially designed titanium plate is fixed to the spine with screws to improve stability. Accompanying investigations have established the advantages of this procedure, a particularly positive influence on the intensity of pain suffered after the intervention as well as distinctly less blood loss. These effects enabled patients to recover more quickly with the possibility of early restoration of mobility. Thus patients who are not paralyzed by the consequences of the accident can and should get out of bed on the first day after the operation. The fact that scars are small and hardly visible after a few weeks is a bonus for patients. Osteoporosis and the spinal column Due to demographic changes in the population in developed countries osteoporosis has become an increasingly common cause of spinal fracture in the elderly. These injuries pose a great challenge from the surgical point of view, as elderly people have a low tolerance for surgery and fixing implants to stabilize the spinal column is difficult due to the poorer quality of the bones. In this case, a large therapeutic gap was filled by the introduction of “augmentative procedures”, which involve the injection of a viscous bone cement into the vertebrae through a cannula. This procedure is known as vertebroplasty. The cement, which hardens within a few minutes, considerably reinforces the vertebra. If the fracture has resulted in a considerable reduction in the height of the vertebra, this can first be raised by inserting and inflating a balloon and can then be reinforced by the introduction of cement (kyphoplasty). Use of navigation systems If precision is of the highest priority, a navigation system may be used to refine all the aforementioned interventions. For this purpose, images of the injured spinal column taken before the operation are compared with data obtained during the operation by X-ray scanning or manual exami-

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nation of prominent structures. The spinal column is then displayed to the surgeon as a three-dimensional model, in which he/she can check and correct the drilling direction as well as the length and direction of screws at all levels. Rehabilitation following spinal injury Thanks to advances in spinal surgery and modern rehabilitation procedures, injury to the spine represents an important turning point in the lives of only some of the victims, namely those who suffer paralysis or another serious functional impairment. Today, in the further treatment of both groups of patients – with and without neurological dysfunction – we can rely on the fact that after conservative or operative treatment, the injured area has been stabilized to such an extent that it is possible to start functional physiotherapy and ergotherapy at a very early stage. In most cases rehabilitation can already begin on the first day after the operation. In the case of patients without neurological impairment, reintroduction into their former professional life is of prime importance. Naturally, the available options vary depending on the patient’s original occupation. A carpenter who fell from a roof thereby suffering a comminuted fracture of the first lumbar vertebra, will hardly be able to continue working permanently and competitively in his trade which involves extremely heavy physical work. Even with today’s modern minimally invasive procedures of stabilization and reconstruction of the spinal column, he will have to undergo retraining if he is young enough. The prospects are more favorable in the case of occupations involving light or moderate physical stress, so we can assume that it should be possible to reintroduce about 80 % of patients into the workforce following spinal injury. In the Germanspeaking region we expect patients to be able to resume work after a period of 8 to 12 weeks. In North America, this period is generally only a few days or weeks.

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Depending on the degree of paralysis, the main aim of the rehabilitation of injured patients with paralysis is to restore their independence. They have to relearn the activities of daily life and adapt to their new conditions. This includes learning to use a wheelchair and moving from the bed to the wheelchair. Insertion of a catheter into the bladder and emptying the bowel pose new challenges that arise from paralysis of the bladder and colon. In Germany and Switzerland, where treatment centers play an exemplary role and are internationally recognized, several months elapse before patients are released from rehabilitation to return home. Paraplegics need life-long, follow-up care in order to recognize the early symptoms of typical complications such as urinary tract infections and bedsores. Whereas 100 years ago 80 to 90 % of paraplegics died of complications closely associated with their injuries soon after suffering the injury, now they have an almost normal life expectancy. Depending on the pattern of paralysis, reintroduction into the workforce is always to be recommended in order to stabilize the patientâ&#x20AC;&#x2122;s social environment. Outlook and summary Considerable further progress in the treatment of spinal injury is to be expected from materials that are introduced into the injured region to replace bone or intervertebral disc tissue as a substitute for the bodyâ&#x20AC;&#x2122;s own tissue and to promote the healing of fractures. The use of bone growth hormones and factors as well as so-called bioactive or bio-absorbable substances also promises to bring advances. Most of the currently used procedures still lead to stiffness in individual segments of the spinal column during the restoration of its load-bearing capacity. The future may lie in the vertebral body being replaced by a body into which the shock-absorbing properties of the intervertebral disc can also be integrated. Further developments will be made to simplify the handling of navigation systems and the precision and thus the safety of spinal operations will be improved.

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New approaches in medication for the therapy of paralysis following injury to the spinal cord also give grounds for hope. Individual studies confirm a positive effect on the recovery of nerve functions when scar-inhibiting or nerve growth-stimulating factors and stem cells are used. National congresses of the relevant professional associations and in particular the annual congress of the European Spine Society offer many opportunities to exchange experience and results in the use of new methods, implants and therapy concepts. The basis for this was the introduction of a standardized classification of spinal injuries (AO classification according to Magerl, Harms, Aebi, Nazarian, Gertzbein) which originated in the working group around the renowned Swiss spinal column surgeon Magerl and which allows comparison of treatment methods for similar injuries. Important impulses also emanate from fellowship programs that permit exchanges of spinal column surgeons between centers for several months so that specialist knowledge and special operative techniques are made available to everyone. Thanks to these developments a clear tendency to agree on common guidelines for the treatment of spinal injury victims has become apparent in recent years, and this has in fact already been realized to a large extent in the German-speaking region.

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Studying Minor Cervial Trauma Injuries Guy Chappuis, Bâloise

Guy Chappuis is a Lawyer, Board Member of the Swiss insurance company, Bâloise, and Chairman of the Sub-Committee Services and Claims at the CEA1. He presents the conclusions of a comparative study published by the CEA on minor cervical trauma injuries, in cooperation with AREDOC 2 and CEREDOC 3 . The results suggest that sharply contrasting national loss experiences relate more to cultural approach than to medico-legal issues alone. The study made several recommendations to national European insurance associations: to distinguish the role and function of a doctor depending on whether he is a specialist or general practitioner; that there is a need for specialized training for medical experts and for greater cooperation between doctors, lawyers, insurers and biodynamic experts; that there is potential for misunderstanding between doctors and lawyers; to develop active communication on problems relating to compensation of cervical injuries; that cervical injuries are a phenomenon of society rather than a purely medico-legal problem; and that technical developments associated with vehicle design are not sufficient to resolve the entire problem of cervical injury claims.

Origin of the study A rise in cervical injury claims was noted at the end of the 1990s. Some countries reported problems whereas others had none. Faced with this imbalance, and in the absence of objective conclusions in this field, the CEA and AREDOC pooled their efforts to prepare a comparative study on cervical injury claims. The aim was to assess the increase in motor liability insurance claims in various countries, its causes and any means open to insurers for influencing this trend. At the end of 2004 the CEA together with the AREDOC and the CEREDOC published a comparative study covering the claims and the cost of minor cervical trauma injuries in motor liability insurance. The study outlines, in summary form, reports from the national insurance associations of 10 European countries (Switzerland, Germany, Belgium, Spain,

2 3

The Comité Européen des Assurances (CEA) is an association comprising the national insurance associations of 33 countries: the 27 members of the EU plus Iceland, Liechtenstein, Norway, Switzerland, Turkey and one associate member: Croatia. www.cea.assur.org. Association pour l‘Etude de la Réparation du Dommage Corporel (AREDOC) www.aredoc.com. Confédération Européenne d‘Experts en Evaluation et Réparation du Dommage Corporel (CEREDOC) www.ceredoc.it.

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Finland, France, Italy, the Netherlands, Norway and the U.K.). It can be consulted on CEA’s website4 where it is available in English, French and German. The study looked at several key points including statistical data, medical issues (specific training for doctors, medical analyses), legal aspects (concept of causality, indemnifiable loss or damage), measures taken by insurers and the reflection undertaken in the field. However, other factors that may have provided additional clarification were not addressed (i.e. headrests, seats and other technical aspects of vehicle design). The same applies to simulation, a difficult subject which would have required lengthy and demanding investigation at an international level. Nevertheless, this article will make a brief reference to the chapter dealing with non-quantifiable injuries. Finally, the study did not cover the time necessary to process claims, which is closely linked to the duration of medical treatment and assessment procedures. On this point, a brief exchange of views highlighted major differences between the various countries, confirmed by the experience of insurance company claims services handling international claims.

www.cea.assur.org

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Definition of cervical injury In order to allow the countries surveyed to consider the concept of cervical injury from a common point of view, a group of doctors drafted a general definition of minor cervical trauma, characterized essentially by non-quantifiable injuries.

Statistical elements Statistics figure prominently in the study. They are summed up in tables 1 and 2 : the first covers claims and the second covers the cost of claims, although it should be noted that these data concern motor liability insurance only.

The definition of the injury makes no reference to the frequently used term “whiplash”. This is not an oversight. Indeed, “whiplash” is not a diagnosis but the mechanism which leads to the occurrence of a possible cervical injury. The use of the word “whiplash” confuses the mechanism of the injury with the injury itself, a confusion which is a frequent source of error. In fact, the mechanism of the injury does not necessarily lead to the supposed injury. Furthermore, the injuries covered in the study are limited to minor cervical injuries which only cause problems insofar as they are not quantifiable.

Claims

Finally, only single injuries requiring treatment are taken into consideration, whether they resulted in complications or not and excluding cervical injuries associated with other injuries.

Table 1

Table 1 For each country, the table shows two values. The left hand column (blue) is the number of bodily injuries expressed as a percentage of the total number of material damage and bodily injury claims recorded in motor liability. In the right hand column (red), minor cervical trauma injuries are expressed as a percentage of the total number of bodily injury claims. The table is completed by average figures, represented in the two columns shown at the right of the table (median). Belgium did not provide data on the percentage of cervical injuries compared with all bodily injuries. Bodily injury claims compared with all bodily and material damage claims vary between 8 % for the lowest figure (the Netherlands) to over double at 18 % for the highest (Italy). The European average is close to 12 %.

20% 18%

66%

14%

76%

16%

12% 10%

Belgium Switzer- Germany Spain land

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40%

53%

40% 3%

8.5%

47%

32%

bodily injuries as a percentage of all material damage and bodily injury claims

33%

minor cervical trauma injuries as a percentage of all bodily injury claims

Finland France

Italy

Nether- Norway U.K. lands

Median

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The percentage of minor cervical trauma compared with all bodily injuries varies from the lowest figure of 3 % (France) to the highest 76 % (the U.K.). The average is around 40 %. Minor cervical injury claims compared with bodily injuries are therefore 25 times higher in the U.K. than in France. The two countries with the lowest figures are France (3 %) and Finland (8.5 %), followed by a group of countries with median figures – Spain (32 %), Switzerland (33 %), the Netherlands (40 %) and Germany (47 %). A third group of countries closes the list: Norway (53 %), Italy (66 %) and the U.K. (76 %). Costs

The country with the highest costs for cervical injury claims is the U.K. (50 % of bodily injury costs), followed by Switzerland, the Netherlands, Norway (40 % of bodily injury costs) and finally Italy (32.6 %). Countries with the lowest costs are France (0.5 %), Finland (0.78 %) and Germany (9 % of bodily injury costs). The average is approximately 27 %. As for average costs per claim, Switzerland had the highest figure at €35,000, followed by the Netherlands (€ 16,500) and Norway (€ 6,050). Countries with the lowest costs are Finland (€ 1,500), Germany (€ 2,500), France (€ 2,625) and the U.K. (€ 2,878). The average is slightly under € 9,000.

Table 2 The costs table provides two figures for each country: the overall cost of minor cervical trauma, expressed as a percentage of the overall cost of bodily injury in one column and the average cost per claim for a cervical injury, expressed in euros. The table is completed by average figures (median). Belgium and Spain did not provide data on this subject.

Euros Table 2

60%

40,000 35,000

50%

30,000 40%

25,000

30%

cost of cervical trauma as a percentage of total bodily injury cost average cost per claim linked to cervical trauma

20,000 15,000

20%

10,000 10%

5,000

0 Switzerland

Germany Spain

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Finland

Italy

Netherlands

Norway

U.K.

Median

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Medical aspects Medical aspects cover doctor training in the assessment of bodily injury and research undertaken by the medical profession to diagnose minor cervical trauma. Assessing bodily injury On this point, there are two separate groups of countries. Regulations in Belgium, Spain and France envisage specialist training in the assessment of bodily injury certified by a university diploma. In the other countries participating in the survey (Switzerland, Germany, Finland, the U.K., Italy and Norway), insurers use experts or medical specialists from various fields (forensics, orthopedics, neurology), with no specific insurance training, to assess bodily injury. Analyses conducted by doctors to diagnose minor cervical trauma Belgium, Switzerland and Spain state that the patient’s previous medical history is the first stage in diagnosis. Belgium and Finland refer to the use of a check-up and the majority of countries also indicate various clinical and imaging examinations. Only France and the Netherlands say that diagnosis is also based on the establishment of the circumstances surrounding the occurrence of the trauma. In addition, France indicates a study of the patient’s previous state of health and an expert discussion between the doctor and patient, on attributing the complications to the injury, without which no evaluation of the complications is possible.

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Legal aspects All countries taking part in the study use the word “causality”. A reading of national reports shows that this concept is not identical everywhere. It does show, however, that compensation of prejudice occurs only insofar as the loss or damage noted can, to varying degrees, be attributed to the accident in question. On the concept of causality itself, only the Swiss report makes a clear distinction between natural and adequate causality. It indicates that the former depends on the doctor’s ability, whereas the latter is a question of law based on a value judgment. With regard to the impact of experiments covering dynamics and bio-dynamics on the assessment of causality, replies from participating countries differ greatly. It should be noted that in Germany, dynamics and bio-mechanics are taken into account by the courts in determining whether the accident could have caused cervical trauma or not. The German report indicates that the majority of courts refuse to accept cervical trauma if the speed at the time of the collision is less than 10 km/h. If the speed is between 10 and 30 km/h, the courts presume the existence of cervical trauma. This trauma is considered to be an established fact when the speed is over 30 km/h. Indemnifiable damage (quantifiable/ non-quantifiable injuries) and simulation All national reports refer to the inclusion of quantifiable and non-quantifiable injuries in their compensation system. Compensation for nonquantifiable injuries is the very essence of the problem in this type of trauma.

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Such injuries raise the difficult question of simulation which is not covered in the study. Experience shows, however, that as exceptional as it may be, the phenomenon is indeed real. In addition, cases of simulation highlight the difficulty which minor cervical injuries pose to the medical profession in terms of establishing a diagnosis. Hence the need for an approach based on rigorous and objective methodology that would serve as a reference in the field, and the need for an inter-disciplinary approach that takes into account the dynamics and bio-mechanics of accidents. National surveys and studies of cervical trauma All the countries participating in the survey refer to studies of minor cervical injuries whether they be organized by experts (Belgium) or universities (Finland) and/or financed by insurance companies (Switzerland and Germany). Pressure groups Belgium, Switzerland, Germany, the Netherlands and Norway refer to associations specialized in defending victims of minor cervical trauma. With the exception of Norway, which gave no reply on this subject, all the countries in which such associations exist (whether specifically aimed at minor cervical trauma victims or not) say that they benefit from the assistance of doctors and lawyers. With regard to doctors, the Swiss report indicates there is a division in the medical profession concerning a scientific approach as well as a quantifiable assessment from an insurance point of view. Recommendations to national associations In conclusion, the CEA study proposed the following five recommendations to national insurance associations:

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• Clearly distinguish the role and the function of the doctor depending on whether he is a specialist or a general practitioner. The study suggests that the objectivity of the expert’s medical opinion depends on such a distinction. This objectivity is based on the expert’s training in assessing bodily injury. • There is a need for specialized training of medical experts. Assessment is a scientific discipline which can be taught, characterized by a strict methodology which ensures its formal exactness and defines the objective quality standards useable by those responsible for settling bodily injury claims. • There is a need for greater cooperation between doctors, lawyers, insurers and biodynamic experts. Cervical spine injuries show the need for a multidisciplinary approach enabling the problem to be looked at globally. • There could be misunderstanding between doctors and lawyers arising from the fact that doctors practice an empirical science whereas lawyers practice a normative one, hence the problem for lawyers in understanding the difficulties of doctors in diagnosis or the difficulties of doctors in understanding the legal rules on causality. • Develop active communication on problems relating to compensation of cervical injuries (publications in medical and legal reviews, themes for legal or medical seminars, information for the general public, etc.). • The considerable differences in claims and average cost per claim from one country to another, which all have high-level medicine and relatively similar compensation systems, show that cervical injuries are a phenomenon of society rather than a purely medico-legal problem. • Underline the fact that technical developments associated with vehicle design are not sufficient to resolve the entire problem of cervical injury claims.

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Conclusion Based on the fact that all the countries participating in the study have a high level medicine and relatively similar compensation systems, the CEA study suggests that the differences in claims and costs between the various countries are due more to a phenomenon of society or a cultural approach in its broadest terms, than exclusively to a medicolegal problem. This hypothesis was confirmed in Switzerland by official statistics concerning compulsory accident insurance. They show a very contrasted rise in the cost of cervical injuries between German-speaking Switzerland and French and Italian-speaking Switzerland: during the period of observation in question, the cost of benefits paid per claim was twice as high in French and Italianspeaking Switzerland5.

These recommendations also show the need for a concerted approach between medicine and the law, based on the inter-disciplinary nature existing between these two major scientific branches. It does appear to be of no use to seek a solution to the problem of minor cervical trauma within each discipline individually. Indeed, divisions within the medical and legal professions hinder an objective approach. In the same context, the creation of insurance medicine at the university level could encourage the sought-after multidisciplinary profile. Both medicine and the law would benefit from the valuable and objective data offered by biomechanics in replacement of the weak and subjective data characterizing non-quantifiable injuries.

In countries where the development of this situation has become alarming, new avenues must be explored to try to curb this trend. Recommendations resulting from the CEA study offer, in this respect, an interesting perspective. They highlight the fundamental role of medicine, postulating a clear distinction between the role and the function of the doctor depending on whether he or she is involved as a general practitioner or as an expert, as well as the need for specialized training for medical experts. It is important, whether concerning the diagnosis or the performance of an expert examination, that methodological approaches based on usable and objective criteria be established. Such approaches must be understood and shared by all parties concerned.

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Guy Chappuis, “La sinistralité des lésions bénignes du rachis cervical: une spécificité Suisse?”, in HAVE/REAS 3/2005, pp. 211.

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A Scale Guide for Non-economic Bodily Injury Damages Dr. Hélène Béjui-Hugues, AREDOC

Dr. Hélène Béjui-Hugues is Managing Director of AREDOC, the French Association for Bodily Injury Compensation Research and Vice President of CEREDOC, the European Confederation of Specialists in the Assessment and Compensation of Physical Injury. She discusses the debates and convergences that gave rise to the European medical scale guide. Since January 1, 2006, this has been the official scale for doctors working in the European Union. The scale provides a clinical approach to assessing the aftereffects of an accident and the objective consequences that these have on daily life. It enables standardization, whilst remaining adaptable to the case in question and to the specific economic environment.

Diverging traditions In Europe, the medical and legal approaches to severe bodily injury vary widely from country to country. Despite continuous efforts at harmonization, true convergence remains a challenge. Nevertheless, over the last three decades several initiatives have made important advances:

• • • • •

• The 1975 resolution adopted by the Committee of Ministers of the Council of Europe was the first attempt to harmonize personal injury compensation in Europe. This resolution set forth broad principles of compensation for physical injury or death, including provisions for full compensation of damage both of economic and non-economic nature. • The 1992 Strasbourg legal-medical congress reviewed the conditions for compensating bodily injury in Europe and highlighted difficulties faced by doctors and legal experts in this field. • A study published in 1999 by the European Insurance and Reinsurance Federation (CEA), and AREDOC detailed the broad principles of bodily injury compensation in Europe and highlighted issues where practices both differed and converged.

Interestingly, various regional idiosyncrasies also emerged. In the U.K. and Ireland, for example, the description of residual damage and its repercussions on the living is considered sufficient. It is similarly used in Germany to establish “pain and suffering”. However, in countries with a tradition of Roman law, it is combined with a scale from 0 % to 100 % reflecting the seriousness of the damage. In addition to this scale, Belgium, France, Italy and Portugal take ancillary damage into account.

The discussions revealed the many different rules and complex welfare systems operating across Europe with regard to bodily injury compensation, differences that go well beyond issues associated with medical assessment. Despite the diverging approaches to medical assessment, the following common elements were identified:

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previous medical history including complaints medical evidence regional anesthesia and clinical examinations studies of complementary examinations impartial attribution, translation of the doctor’s opinion into clear language to support the overall summary and substantiate conclusions.

Two traditions diverge in Europe: • A “Latin” tradition that focuses on the importance of damage to the person and uses a scale along with a list of specific damages which varies by country. • A “Northern” tradition that focuses primarily on economic factors (Germany and Luxembourg) and a less extensive but prevalent use of medical and legal scales with varying degrees of official status (Sweden, Norway and Denmark).

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Facilitating compensation across Europe The freedom to circulate among member states has led to a growing number of claims involving nationals from several European countries. To facilitate claims settlement for victims of accidents occurring outside of their home countries the 4th European Motor Insurance Directive (May 2000) instituted direct access in the victim’s home country to a representative of the liable party’s insurer. Consequently, the insurance representative in one country was required to know the rules in another. In order to apply the Directive, EU countries started thinking about a harmonized approach – one with a joint medical assessment and a single medical assessment scale – without undermining the compensation rules within each member state. To this end, in 2000 the Trier Academy of European Law, a foundation established in 1992 at the initiative of the European Parliament, set up a study group to standardize assessment and compensation methods for victims of traffic accidents. The Trier Academy voted to adopt a recommendation submitted to the European Commission, the European Parliament and the Council of Europe to create a single assessment tool and to develop a common compensation project. Two working groups were set up with members appointed by their respective countries: • A medical group: this group of physicians looked at the consequences of permanent noneconomic damage and the resulting physical and mental aftereffects. Their task was to propose a single concept and a reliable tool which could be replicated to ensure an objective assessment by all doctors within the EU. • A legal group: legal experts and members of CEREDOC. This group looked at solutions for describing and classifying the various impairments.

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The medical group restated the definition of noneconomic damage as damage arising from a personal loss which can be medically observed or explained. Such damage is personal in nature and can be defined independently of any economic context as being damage to normal activities in daily life, as shared by all men and women. Therefore, this type of damage includes primarily permanent impairment to physical and mental integrity and secondarily various instances of damage such as aesthetic or sexual loss and impairment in specific leisure activities. Compensation concept: Impairment to Physical and Psychological Integrity (IPPI) The initial principle was to note that every human being is different but that all perform the same gestures and carry out the same actions on a daily basis in a private context. The groups therefore came to a precise and comprehensive definition of impairment to physical and mental integrity: “A permanent diminution in physical, psychosensorial or mental potential, arising from physical or mental impairment, which can be assessed by means of an appropriate clinical examination in addition to examinations relating to the damage described and the consequences normally concerning said damage in daily life.” For the doctor, this is an assessment “in abstracto”, with an objective evaluation, unrelated to the victim’s or the expert’s location or that of the accident. For a like-for-like physical and mental status and identical after-effects, the rate of physical and mental impairment should be the same. In other words, the same damage results in the same aftereffects. In addition, any social and/or professional effect has to be described or explained with the aim of equal treatment for all victims within the EU.

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The legal group proposed several harmonization solutions including the development of a compensation reference system for IPPI indicating a number of points related to each IPPI percentage rating, weighted by age and by the percentage amount. It was suggested that each state assign a financial value to the amount according to its own economic criteria with the possibility of granting the courts a margin of assessment. The group considered this proposal with regard to specific injury cases such as aesthetic and sexual impairment and specific impairment to leisure activities. The group concluded that each member state should be free to draw up a list with minimum and maximum compensation amounts, given that the compensation reference system would be optional whenever the IPPI rate exceeded 70 %. Medical assessment tool: the IPPI scale The medical group raised the issue of the need for a scale and wanted to explain why a mere description (many countries work in this manner and do not have particular compensation concerns) would not suffice. The benefit of an assessment tool for some of the instances of damage is to supplement the descriptions, which cap assessment reports in countries not using the scale with a rate that reflects the existence and gravity of aftereffects. There is a twofold risk which may prompt a mistaken interpretation: • risk inherent in personal interpretation of findings by the compensation decision-maker • risk of linguistic alterations if the assessment report is sent from one country to another. Armed with an endorsed, precise and comprehensive concept, the group developed an assessment tool known as the “European Scale Guide for Medical Evaluation of IPPI, Impairment to Physical and Psychological Integrity” 1. 1

The scale’s development took account of two requirements: a mandatory contractual approach, but one that strove at all times for consensus on proposed rates so that proposed solutions would be acceptable to the parties involved, given that none would be completely satisfactory to all parties. The consensus approach entailed observing a reasonable ranking of depreciation factors within a similar function (not always the case in current national scales). The consensus approach also entailed searching for consistency not only in vertical terms but also horizontally to propose indicator rates and pivotal rates for specific aftereffect situations which take account of the values currently acknowledged in the various EU states. Indicator or pivotal rates in the “Euro scale” are accordingly represented by the same values for the same organs, functions and standard depreciation factors. The physical/psychological integrity impairment rate is a 0–100 % scale and reflects the difficulty experienced by all subjects, with aftereffects quantified in this manner, to perform actions in daily life independent of any economic factors. The rates refer to the individual taken as a whole, whereas after-effects are considered separately. A rate of 0 % refers to absolute physical and psychological integrity, whereas a rate of 100 % refers to the complete loss of all functions.

Guide barème européen d’évaluation médicale des atteintes à l’intégrité physique et psychique. Ed. Anthemis, 2006, 102 pp.

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Using a concrete approach to losses, the evaluation scale provides an index, fully in line with the concept of impairment to physical and mental integrity, which must be regularly tailored to developments in pathological consequences. A scale guide must make it possible for an assessment to be replicated by different experts in the various European countries with the same resulting conclusions for the same aftereffects.

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The medical group used existing tools represented by national legal and non-legal scales and references to practices in countries not using scales (such as the Netherlands and Scandinavia), but also referred to specialists who had already worked on recent scales (Spain, Italy and France) and to specialists and disciplines in various countries with acknowledged bodily injury skills. In sum, around 80 specialists contributed to the development of the scale including the members of the initial working group and the members of CEREDOC. Use of the scale guide by doctors The scale is based on a clinical study of aftereffects and can be duplicated by all experts in all EU member states. It is easy to use and can be amended according to pathologies and progress in treatment. The scale guide is intended solely for doctors and specifically doctors with expertise in bodily injury assessment and its rules (prior condition, multiple disability, attribution, etc.). However, a scale guide is neither a manual for aftereffect pathology, nor a medical and legal summary on how to assess bodily injury. It cannot, by any means, offset the assessor’s lack of ability, irrespective of the context and his or her responsibilities. Furthermore, the scale guide is not a comprehensive catalogue. It does not systematically provide ready-made figures. Rather, it imposes a clinical approach to aftereffects and an analysis of their objective consequences on daily life. The doctor must therefore include, with the physical and psychological integrity impairment rate, an explanation indicating the reasons behind the rate he/ she is proposing.

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The rate is not a legal or medically established truth. It is an indicator predicated on the requisite description of the consequences of physical/ psychological integrity impairment in the victim’s professional and personal life, including sexual and leisure activity as well as a recommendation for offsetting the handicap. Furthermore, it must be possible to replicate assessments that use this scale. Indeed, an assessment of strictly subjective impairment can be medically explained and is therefore plausible even though it cannot be noted. One example is that of strictly subjective post-traumatic syndrome which cannot be measured. Although assessments should be carried out they must not depend on the intensity of the complaint or on the plaintiff’s skill. They can be performed only on the basis of a single scale. In this instance, such a syndrome is rated at 2 %. Europe adopts the IPPI scale The scale guide was officially presented to the Academy of European Law in 2003 and was recommended by the European Parliament which advised using the European scale guide as developed. The European Parliament undertook to translate the scale in all the official languages of the EU. The scale was adopted by the European Commission and since January 1, 2006 an EU regulation states that the medical scale guide is the official scale for assessing the aftereffects of work-related and personal accidents for all European civil servants.

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As per a recommendation by the European Parliament, a Scale Guide European Observatory was established consisting of doctors coordinating the scale guide and doctors from the European Commission. The scale is therefore revised on a continuous basis in response to observations and suggestions submitted by users to ensure that solutions are offered when difficulties of use are encountered and that progress in medical knowledge enhances assessments. Conclusion Because reliable medical assessment of bodily injury depends primarily on the expertise of the doctor carrying out the evaluation, he/she must acquire the necessary specialized knowledge in addition to a medical background. To ensure full harmonization in assessment terms, Europe would do well to develop a university course in specialized studies for assessing human impairment. This course would be aimed at doctors working in this area and would apply a specific methodology to ensure the fairest possible assessment. The scale guide can now be used in all European states to quantify non-economic (personal) injuries by setting an IPPI rate, which is a significant achievement in itself. This is a good, modern tool that is the result of a consensus among skilled specialists and leading medical experts in Europe. By promoting transparency, clarity and equality, it can help to ensure better and fairer settlements.

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26.6.2008 18:16:27 Uhr

Case Management and Rehabilitation

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Change within this area of insurance is not only improving victims’ access to care and treatment by way of case management, but is now increasingly focused on helping people to return to as normal a life as possible through an optimized rehabilitation process. The following four articles from within and outside of Europe show the wide range of implementation solutions being utilized to achieve improved and sustainable accident victim support.

page

Active Rehabilitation Management, Germany Restoring a person’s capacity to work in a former or alternative occupation and helping them to overcome other difficulties associated with their disability is a relatively new service in the German market, but one which is showing positive results for injured persons and accident insurers.

A Shift in Claims Management, France In dealing with claims, AXA has turned to a case management approach. Combined with annuities and direct payment methods, the company is offering an independent “One Service Desk” to better define and meet the real needs of the injured.

A Centralized Approach to Compensation, Quebec The Automobile Insurance Board of Quebec administers a no-fault compensation system for motor bodily injury. With a centralized, common approach that includes trauma services, medical and rehabilitation care networks, bodily injury compensation has become much more effective and reliable.

Solution for “Lifetime” Care Needs, Tasmania With specially designed accommodation and rehabilitation initiatives to restore independence, Tasmania’s Motor Accidents Insurance Board (MAIB) is taking a unified and cost-effective approach to the “lifetime” care and support needs of severely injured traffic accident victims.

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Active Rehabilitation Management, Germany Jürgen Mesecke, PARC

Jürgen Mesecke is owner and Managing Director of PARC, an underwriting and claims management service provider for the German insurance industry. PARC was founded in 2003 and is based near Hannover. Besides offering all regular underwriting and claims management services PARC conducts audits and provides seminars and training. The company is strongly engaged in medical and occupational rehabilitation management of disabled persons, a relatively new service in the market that aims to restore a person’s capacity to work in a former or alternative occupation and to help them to overcome other difficulties associated with their disability. In this article, Jürgen Mesecke demonstrates how this service can reduce claims expenses while offering a better future to victims.

Introduction In the rehabilitation of accident victims with longterm disability, the statutory health insurance system and private insurance companies in Germany sometimes operate according to rigid concepts that do not always provide optimum support for the rehabilitation of accident victims. Through the greater use of active medical and occupational rehabilitation management in regulating long-term disability benefits for victims of accidents and disease, the private insurance sector can improve its service to victims and also reduce claims expenses.

Regulation of benefits for accident victims with long-term disability Accidents leading to long-term disability result in a high cost to the German economy. Although the actual number of accidents has been declining for some years thanks to prevention and awareness campaigns, the cost of providing benefits to the victims still poses a great challenge to the statutory health insurance system and private insurance companies. The statutory benefits are increasingly seen as no longer capable of being financed, and appropriate cuts have already been made in some areas or are under discussion.

The aims and possibilities of active rehabilitation management are illustrated by the example of accident victims with private disability insurance. It clearly demonstrates that early investment is rewarded in many cases: on the one hand the return of the accident victim to working life is made easier and, on the other hand, the insurer pays out benefits for fewer years.

When benefit claims for accident victims with potential long-term disability are processed, it is noticeable that the statutory insurance schemes (health and pensions insurance, employer’s liability insurance association, long-term care insurance) often work to rigid patterns. Apart from individual case management for accident victims, these providers also have to ensure that the range of benefits on offer is as fair and the decision on benefits as comprehensible as possible. This gives rise to a set of benefit regulations that offer little scope for individual decision. The labyrinth of regulations is too onerous for accident victims to handle themselves. Often, they are not even familiar with their rights.

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There is also sometimes a lack of communication between the different national providers, leading to sub-optimal support of accident victims or people with chronic diseases at a time when those people need it most. Rehabilitation processes are delayed due to the lack of knowledge and often curtailed while the insured has become permanently disabled or while reintegration failed.

It is crucially important for successful rehabilitation management, however, that use is made of the various rehabilitation opportunities offered by the statutory health insurance system and private insurers. The coordination of various measures and clarification of any costs to be covered are among the most important tasks of the rehabilitation manager.

Furthermore, private insurers in the field of accident, liability and disability insurance often process claims according to a given and strict concept, without consulting other national or private providers. Instead of using the advantages of active rehabilitation in suitable cases, traditional claims management methods continue to be applied. Often, overall cost cutting programs accelerate the trend towards a pre-structured and minimized claims assessment.

Rehabilitation management in practice The individual steps to achieve a successful return to work for accident victims with possible long-term disability, are illustrated with the example of private disability insurance. In private disability insurance, disability pensions and, if applicable, a premium waiver for the main insurance are routinely paid at the agreed rate. When there is a diagnosis of at least 50% disability (on a pre-defined scale), the benefit is paid as arranged. The definition of disability refers in most cases to the previous or comparable occupation.

Active rehabilitation management The aim of active rehabilitation management is to restore the capacity to work in the patientâ&#x20AC;&#x2122;s former occupation or in an alternative occupation. Accident victims or those affected by serious illness are shown ways to overcome their difficult health and economic situation. Of course, it is impossible to reverse the occupational disability of all accident victims. A preliminary selection of all accident victims who are eligible for rehabilitation is essential. It is important for the subsequent success of reintroduction into employment that medical and occupational rehabilitation begin as early as possible. Investigations confirm that accident victims are far more flexible and open in their response to rehabilitation assistance in the early phase immediately after the accident. An early start to rehabilitation can also substantially reduce the time needed and the overall cost.

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General assessment If the benefits are to be paid to an accident victim by his/her private disability insurance, then the application for a disability claim is first reviewed in the same manner as the general assessment of disability without any particular consideration of rehabilitation management. This mainly consists of an analysis of the existing medical restrictions (medical assessment), while taking into account the legal principles based on the terms of the policy (legal assessment). For some time, occupational analysis has been increasingly performed to identify the sub-activities involved in a job and to assess the residual functional capacity based on documentation or on a visit of the applicant to his/her former workplace (occupational assessment).

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In addition, analysis of the accident victim’s financial situation increasingly influences the decision to accept or reject the application for a disability pension (financial assessment). For example, such an analysis may involve a review of income development in the case of employed people or of operating results for the self-employed. Preliminary assessment for active rehabilitation A cost/benefit analysis must be performed before every review for active rehabilitation. Not every case is suitable for active rehabilitation management due to the severity of the accident-related disability, the clinical picture or the occupational circumstances. It is also not always possible to reactivate the insurance client to his/her former profession or an alternative job through medical or occupational counseling. Preliminary visit with the injured patient When a request for active rehabilitation is submitted to the rehabilitation manager, a preliminary visit to see the injured patient in his or her surroundings is coordinated closely with the insurer to address the following points: • Discussion of personal and family situation: inquiries into future plans (wishes and possibilities), obtaining information from the client’s environment (place of residence, infrastructure, etc.). • Discussion of health problems: information on medical aids, highlighting of alternative methods of medical treatment or pain alleviation. • Detailed determination of the sub-activities involved in the former occupation before and after the accident: – For the self-employed this entails a review of financial circumstances and possibilities for reorganization within the business (heavily dependent on the size of the business). – For the employed it involves the consideration of retraining opportunities.

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The rehabilitation manager literally leads the accident victim by the hand. Establishment of mutual trust is of prime importance. Steps to implement active rehabilitation As soon as the life insurer has agreed to the proposed course of action, there are numerous possibilities in every single case for providing the client with individual and flexible support through active rehabilitation management. The following examples are intended to illustrate the procedure that may be followed in individual cases: • Insurance providers: coordination of the range of benefits offered by the statutory health insurance system and any private insurers involved in the context of rehabilitation. • Medical rehabilitation: communication with medical rehabilitation clinics and the physicians involved. Request expert reports from specialists and special clinics. Coordination with and referral to special institutions 1. • Occupational rehabilitation: discussion of possible retraining measures by the vocational promotion service and similar institutions. Involvement of special institutions to determie residual functional capacity in the previous job or an alternative job.

For example, the integration center for cerebral paresis, spiro-ergometry centers for the measurement of organ function as a means of determining physical capacity or physiotherapy facilities for medical and psychotherapeutic treatment of the effects of trauma.

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Examples of active rehabilitation management The contribution that can be achieved through active medical and occupational rehabilitation management and the potential savings that may result for the insurer are made clear in the following practical examples. Active rehabilitation management for an employed person General assessment Personal data: Peter W., 18 years old at the time of the accident. Education: secondary school without diploma, apprenticeship as a bricklayer Description of accident: on July 2, 2004 injury during sports at vocational school with injury to medial meniscus of both knees, unable to work as bricklayer despite three operations, afterwards unemployed. Insurance: from February 1, 2005 disability pension with exemption from contributions for principal insurance (decision of primary insurer). Preliminary review for active rehabilitation and initial visits (June 2006) Visit to the client’s place of residence: family doctor, client, alternative businesses for any vacancies, evaluation of local environment, with the following outcome of the visit: Insured person: small person of slight build, not suited to bricklaying, limited intellect, difficult family circumstances. Medical situation: confirmation of knee problems. Job situation: two retraining efforts financed by the federal employment office failed due to belowaverage performance, interest in electrical engineering, motivation of client, highlighting of personal solutions (moving out of parental home).

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Steps towards implementation/conclusions Consultation with employment office. After difficult negotiations new psychological test with improved result. In February 2007, approval of new retraining as a service specialist for the maintenance of photocopiers and printers with expected completion of training at the end of November 2007. In September 2007, work placement was planned with a service contractor. Employment after successful retraining could be possible. If it is not possible, the rehabilitation consultant will support the search for a suitable employer. Expected end of payments of his disability pension: December 31, 2007 Benefit payments plus reintegration assistance (€ 561 disability pension per month including exemption from contributions up to age 60):

€ 30,000

Cost of rehabilitation manager: Cash value on January 1, 2008 of the monthly pension potentially saved:

€ 3,500 € 113,000

Active rehabilitation management for a self-employed person General assessment Personal data: Frank D., 40 years old at the time of the accident, married, two children. Education: paint shop supervisor, self-employed since 1991, a company specializing in painting and powder coating, co-worker, two employees. Description of accident: June 18, 2004 tendon avulsion with nerve damage to the right heel bone when using a lifting device to raise a 150 kg metal column for painting. Consequences: severe pain, change in gait pattern and loss of weight-bearing capacity. Various medical tests without any result or therapeutic approaches. Insurance: life endowment insurance with a rider for disability: € 3,128 disability pension per month including premium waiver up to the age of 60.

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Review for active rehabilitation and initial visits (July 2005) Visits to client with inspection of business operation, evaluation of client’s local environment (infrastructure, alternative employment, living situation), with the following results: Insured person: muscular man, gives impression of helplessness, urgently needs active support, fears for future. Medical situation: unsteadiness of gait, wears a special shoe. Job situation: financially very tight business circumstances, marked decline in orders owing to relatively low qualification of two employees, establishment of an alternative existence not involving heavy physical work is difficult, selling the business is not a solution (offers far short of value). Steps towards implementation/conclusions After extensive medical tests of disability resulting from the injury, conclusion that a return to the previous heavy physical work is excluded. Recommendation to the insurer to pay a disability pension and exempt the insured person from contributions between July 1, 2004 and March 31, 2006. Further case management: the rehabilitation manager holds settlement negotiations in the presence of the insured person’s lawyer and an employee of the insurance company. It is clearly shown in these negotiations that a one-off payment to reduce the debt is a better form of assistance than the continuous payment of a pension. At the same time, it is recommended that an experienced painter be hired who would be able to win back old customers through the quality of his work.

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His disability pension was discontinued on March 31, 2006 Benefit payments: One-off payment as settlement: Cost of rehabilitation manager Cash value on April 1, 2007 of the monthly pension saved:

€ 66,000 € 163,000 € 6,000 € 425,000

Limits of medical and occupational rehabilitation management Age of accident victim Until now it was often considered impossible to find jobs for health-impaired people over the age of 45. However, various circumstances are gradually leading to a rethink in the economy, (e.g. raising the age limit for retirement on a statutory pension from 65 to 67) and falling unemployment figures. Older employees with their great professional and life experience are increasingly in demand. Depending on the individual assessment of the rehabilitation manager, however, attempts may also be made to provide support for older employees in medical and occupational rehabilitation. Of course, the ratio of cost to the diminishing cash value of pension payments as age advances must be taken into account. Fraud Unfortunately, there are always accident victims who try to obtain unjustified benefits from the private and statutory insurance organizations. Simulation or aggravation often plays a considerable role in such cases, especially in cases of accident-related trauma. Moreover, in times of general economic stagnation an increase can be seen in the number of “economically induced” disability applications. Here, observation is also indispensable in individual cases. In contrast to the use of professional detectives, experienced rehabilitation managers and auditors of benefit payments have a clearer view.

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Motivation The motivation of the accident victim to return to working life is the basis for successful active rehabilitation management. Without the work of the rehabilitation manager, this objective can be achieved in substantially fewer cases. Conclusion Active medical and occupational rehabilitation management offers a great opportunity to help accident victims in difficult circumstances at the earliest possible stage and to map out a promising future for them and their families. With clever coordination, it is possible to use what is often a rigid statutory insurance system and to counteract the lack of communication that is frequently seen between insurance organizations. Of course, the procedure described here cannot be applied in every case. The severity of an injury or a disease, as well as the cost of rehabilitation in relation to the cash value of disability benefits, reveals the limits of active rehabilitation management. Active rehabilitation management offers enormous opportunities in the regulation not only of private disability insurance, but also of liability insurance. Increasingly, insured clients and their insurers should work as partners. Everyone involved can only benefit from this.

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A Shift in Claims Management, France Paul-Henri Rastoul, AXA

Paul-Henri Rastoul, Group Head of P & C Commercial Underwriting at AXA Cessions and former Technical Director for Bodily Injury and Liability Claims at AXA France Solutions, explains how AXA has turned to a case management approach for large bodily injury claims in France. Combined with annuities and direct payment methods, the company is offering an independent “One Service Desk” to better define and meet the real needs of the injured.

Balancing victim care with insured liability issues The great challenge of bodily injury claims management is to achieve the delicate balance of, on the one hand, proactive assessment of the level of disability and the need of care for the victim and, on the other hand, the involved insured liability issues. Today’s insurance industry has not yet achieved a reasonable balance between these two elements to reconcile an appropriate level of service towards the disabled victim with the need to limit the liability of the insured. For this reason, most victims involved in serious liability cases go before the courts for settlement and do not accept the insurance compensation proposed by the insurers. Such a situation cannot continue for long. The liability issue is being used as an excuse to prevent a proactive approach towards disabled victims. There is also a similar observation of lack of proactive settlement of personal accident cases resulting from first-party insurance products. Bodily injury claims management is starting to emerge as a major discipline that requires a real expertise to assess the reality of injuries incurred and the consequences of these injuries on the future quality of life of the disabled victim.

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The French legal environment In France, the time between a large bodily injury claim occurrence and the final claim settlement ranges on average from between five and eight years. Such a long settlement period should be seen as an opportunity to provide a proactive servicing approach towards the injured victim, thereby creating a positive insurer-client relationship. On February 11, 2005, specific laws were passed in France in favor of the disabled, promoting the concept of a unique servicing platform and multidisciplinary teams. Indeed, a strong parallel exists between what could be done in bodily injury insurance claims management and the general direction that the government wishes to push through public institutions and regulations. A new approach to claims management The new approach that we use is based on the four following basic principles: • new service: the “one service desk” approach • new methodology: from claims management to case management • new way of working: from fiction to reality • modern compensation: from approximate cost to fair value.

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A new service: the “one service desk” approach Providing additional services during the claims settlement process has become a general practice. For example, replacement vehicles or car assistance is well developed and has been offered for many years much like property damage claims where insurers offer immediate repair directly to their clients instead of monetary compensation. With regards to bodily injury claims, the “loss of care” assistance towards the client is divided into many different types of service. As a consequence of such a large spread, a service integration approach was until recently seen as unrealistic and not feasible for bodily injury claims. However, in view of the updated French regulation related to the disabled, we can now propose a One Service Desk (OSD) solution.

For obvious ethical reasons the servicing platform has to be independent from the insurance company and should offer loss-of-care assistance and domestic services to different people and companies, and not only to insurers. In our case, the platform retained is currently also serving customers of American Express, among others. The OSD designs a package consisting of loss-of-care, medical and domestic services that it then implements and maintains independently. The implementation and maintenance dimensions are essential. The OSD is a powerful tool which will provide real added value to the claims management offering process. However, the OSD approach will not be efficient without a new methodology related to bodily injury claims management. This new methodology would be to shift from claims management to case management.

The OSD solution consists of putting at the disposal of bodily injury claims managers an external servicing platform with the capability to define and entirely fulfill the needs of an injured person. The challenge of such a platform is to be able to reconstruct the life of the victim who has lost a large portion of his autonomy. The objective of the OSD is to compensate “the need to be” rather than “the need to get”.

Figure 1 OSD (One Service Desk) Approach

Life annuities department BI Claims Manager Medical appraisal

Domestic services

Medical supply

OSD (One Service Desk)

Victim coaching

Psy support Employment support

Home adaption

Vehicle adaption

Victim

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A new methodology: from claims management to case management With a case management approach, actions will have to be taken by the insurer at all major steps of the recovery process following the bodily injury accident. Between the first indications of recovery until the stable level of disability, the claims manager will have to initiate specific actions towards the victim. The OSD platform will dedicate a team placed under his responsibility to manage the case and implement the services proposed to the victim to comply with the achievement of his/her new life project. With this case management methodology, we will be able to create a new working relationship between the insurer and the victim, making out of court settlements easier and more accessible.

Figure 2 The Case Management Process

Collection and transfer of elements

Feasibility study and proposal negotiations

A new way of working: from fiction to reality What used to be a unilateral intellectual exercise will now evolve into a situation where claims managers can rely on realistic predictions to substantiate their compensation proposals. With this new methodology, most of the elements of an indemnification offer would have already been implemented and put into use by the victim. Therefore, the accurate number of hours of “lossof-care” assistance and the price related to it will not be questionable. The compensation to be agreed upon will then have to match the victim’s new life project. We will have on-hand real tangible figures to determine the nature and level of the compensation to offer. Thus, compensation becomes much less approximate and will correspond to the value of services currently used by the disabled victim to achieve a new life project.

Organization and supply of services

Quality control and maintenance of services

Claims declaration to OSD Claims declaration to OSD

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Negotiations and audit of victim’s needs

Indemnity offer

Closing of claims file

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A modern compensation: from approximate cost to fair value The prerequisite for such an innovative approach is to make payments through life annuities in order to ensure that care needs are correctly fulfilled throughout the entire lifetime of the disabled victim. Therefore, the way that such annuities are indexed for inflation remains a key issue. Under French regulation, annuities indexation for motor liability insurance is similar to that of social security. Furthermore, this indexation is reimbursed every year to the insurers by a dedicated public fund. Another modern payment method is the use of CESU (Universal Check for Employment) for direct payment to the victim for the “loss-of-care” services. The CESU is a means of payment which works like a bank note dedicated to a specific purchase. This means that it guarantees that the “loss-of-care” indemnification fees would be used by the victim for “loss-of-care” services and not for other purposes. The OSD should be able to issue and propose CESU for the payment of services provided to the disabled victim. Conclusion AXA has experimented with these four principles in France and has seen very encouraging results by improving the predictability of ultimate costs. This new approach has also helped to improve the level of service and satisfaction of victims: direct payment and the one-desk approach are the main components of a better overall service and followup. These principles can be applied both for liability and motor bodily injury claims and may be extended further to other markets where the AXA Group operates and has local subsidiaries.

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A Centralized Approach to Compensation, Quebec Jean-Louis Gauvin, Morneau Sobeco

Jean-Louis Gauvin is an Actuary and Associate Partner at Morneau Sobeco, the largest Canadian-owned pension and benefits consulting and outsourcing firm. He was also Chairman of the Quebec Motor Insurance Inquiry Commission from 1971 to 1974. He describes the nofault compensation system for motor bodily injury created in Quebec in 1978 and administered by the Automobile Insurance Board of Quebec. With a centralized, common approach that includes trauma services, medical and rehabilitation care networks, bodily injury compensation has become much more effective and reliable, improving the process for victims while simultaneously cutting costs.

The 1978 reform The early 1960s in Quebec are often considered the start of a silent revolution which radically transformed Quebec. As in the rest of North America, it was a time when the number of vehicles in use grew at a phenomenal rate, nearly doubling between 1960 and 1970 with a similar rise in the number of traffic fatalities. The fatality rate per 100,000 inhabitants rose from 16.6 in 1960 to 27.5 in 1970. Since then, the situation has improved: from nearly 2,000 deaths in 1972, the rate fell to approximately 700 in 2006.

Amendments to the law Various amendments have been made to compensation conditions since the 1978 reform to reflect changes in the role of women, less stable marriages and case law developments in terms of “pretium doloris” compensation. The latest amendments date from 2000. Hopefully, there will be more frequent revisions in the future in order to better reflect the expectations of victims and developments in Canadian case law for bodily injury arising from automobile accidents or other types of accident in Quebec.

In the early 1970s, the Quebec government set up a Motor Insurance Inquiry Commission to consider the issue of the constant and major increases in motor insurance premiums and to propose a system of compensation for victims of motor accidents at optimum cost collectively. The report was published in 1974 and a reform, heavily inspired by the report, was implemented four years later.

Some aspects of Quebec’s system Quebec dropped the right to legal action in 1978 in favor of a right to compensation, preferable by far, even though in some individual cases the right to legal action may be more beneficial (if the damage has been appropriately assessed, an insured or solvent wrongful party is found and the case is won before the courts if required).

The new motor insurance system entered into effect in Quebec on February 1, 1978 and included the following measures:

One of the features of the system is that all Quebeckers are insured irrespective of the location of the traffic accident. This is a specific feature that is rare in motor insurance coverage and is unique in North America.

• in terms of bodily injury, a no-fault compensation system administered by a state monopoly • no third-party subrogation or recourse • direct compensation for property damage by the vehicle insurer according to various coverage options and compulsory insurance • open competition between private insurers who file pricing structures with the regulatory authorities (no prior approval required).

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Compensation Compensation for bodily injury: • • • • • • • • •

loss of income compensation custody cost compensation lump sum compensation for students lump sum compensation for non economic damages residential assistance availability allocation compensation for labor costs (family-owned companies) medical and paramedical costs rehabilitation compensation.

Lump sum death benefits: • compensation for victims without living spouses or dependents • compensation for the spouse • compensation for an invalid spouse (additional amount) • compensation for dependents other than the spouse • compensation for funeral costs. Compensation amounts are annually adjusted to the cost of living and exempted from tax. Since 1978, the Automobile Insurance Board of Quebec (Société d’Assurance Automobile du Québec; SAAQ) has paid CAD$ 8.4 billion in compensation and CAD$ 400 million in rehabilitation for nearly 900,000 victims of traffic accidents. Additional costs for these victims have a present value of CAD$ 8 billion.

Relative cost stability The Quebec government justified the commission’s analysis by the increasingly high cost of motor insurance premiums in the province. The situation has changed markedly since then and it is interesting to consider the situation both in Quebec and in various Canadian provinces. A working group from the Canadian Institute of Actuaries analyzed trends in the cost of claims between 1998 and 2002 in nine Canadian provinces. The analysis covered both bodily injury and property damage but did not consider management costs and focused solely on the cost of claims both for bodily injury and property damage. In considering the results of the analysis, it should be noted that the provinces of Manitoba, Quebec and Saskatchewan apply no-fault compensation systems 1. Ontario applies a no-fault system with high benefits and a deductible for the right of legal action. The other provinces apply a liability system with very limited no-fault benefits.

Quebec

Average claim per vehicle over 5 years 505

Average cost increase over 5 years (%) 515 2.2

Claim per vehicle in 2002

Saskatchewan

525

575

5.7

Prince Edward island

572

4.0

Manitoba

588

714

10.2

Newfoundland

661

657

4.4

Nova Scotia

666

688

5.6

Alberta

727

761

2.4

Ontario

822

928

8.2

New Brunswick

843

842

2.8

Table 1 Average cost of claims per vehicle (1998 –2002) – bodily injury and property damage. All figures are in Canadian dollars.

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Saskatchewan offers a choice in system; 99% of vehicle owners have opted for the no-fault system.

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Quebec therefore recorded the lowest claim costs as well as the lowest annual increase over the five year period. The aim of stabilizing motor insurance in Quebec was achieved, although this was not one of the major components of the reform that was intended to ensure more effective compensation for victims of bodily injury and specifically those who suffered extensive injuries and trauma. The main weaknesses in the liability (or fault) system with a single and definitive payment scheme concerned bodily injuries in which minor lesions were over-compensated, although extensive bodily injury were notoriously under-compensated. Serious bodily injury One of the aims of the commission in the early 1970s was to propose better compensation for motor accident victims, especially victims suffering from extensive aftereffects. One of the measures proposed was to abandon the system of payment of a capital lump sum in favor of an annuity to replace loss of income, with the file re-opened in the event of a relapse or deterioration of the victim’s condition as well as protection of compensation against inflation. One very important aspect of the reform was the direct and constant involvement of the SAAQ in the compensation process. Whether it is for medical treatment, rehabilitation or assistance in return to the workplace, SAAQ representatives are always present to facilitate the victim’s reinsertion in the community and to ensure that appropriate treatment is available. Before reviewing the impact of the compensation system for the seriously injured, it is useful to review the total number of accident victims in Quebec (table 2). Quebec has a population of 7.5 million, with nearly five million motorized vehicles.

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Type of injury Fatality

Number of accident victims (2006) 717

Serious injury Slight injury

3,714 46,012

Table 2 Number of accident victims in Quebec in 2006, by level of injury.

The situation has improved in Quebec since 1978, when the system managed by SAAQ was implemented. At that time, there were 1,765 deaths from motor accidents. Despite the progress achieved, there is still work to be done to improve road safety. The SAAQ takes care of the entire compensation process for victims and boasts, among others, compensation managers (approximately 200), doctors in charge of assessments (approximately 30) and physiotherapists (approximately 100 throughout Quebec). From its early days, the SAAQ has been involved in improving the system for handling people who require trauma services and other medical and rehabilitative care. An integrated trauma services system was implemented and has had a major impact on victims, not only in motor accidents but also in other types of accident. The involvement of the SAAQ has been acknowledged as having a major effect in developing an approach intended to: • lower immediate and subsequent fatality rates arising from the effects of trauma • manage the pre-hospital phase (911, first aid, paramedics) • manage the hospital phase (approximately 80 trauma centers: primary, secondary, tertiary and medical stabilization) • post-hospital phase (17 rehabilitation centers and 14 community organizations for long-term support).

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The network implemented for trauma cases includes: • • • •

4 tertiary centers 27 secondary centers 26 primary centers 22 medical stabilization wards.

The SAAQ has made a vital contribution to recognizing various trauma centers and the specialization of these centers throughout Quebec. Such an approach has been made possible through a single division in charge of victims with injuries from motor accidents and is due to SAAQ’s interest in improving the system’s efficiency. Rehabilitation Rehabilitation is another area where the influence of SAAQ has been vital. By virtue of its statues, the SAAQ is involved in the rehabilitation process to: • Optimize the process: – reduce disability – shorten the duration of disability – reduce the cost of the system. • Monitor services: – accessibility – quality – cost. To fulfill its obligations, the SAAQ has signed agreements with rehabilitation services and with 41 organizations that support social integration throughout Quebec. Once again, the SAAQ has an impact not only on motor accident victims, but also on the victims of other types of accident.

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Lessons from the Quebec experience In terms of serious injury, relevant lessons can be drawn from the experience acquired in Quebec: direct involvement in the trauma and rehabilitation ward processes in addition, obviously, to improving compensation. It is in the interest of insurers to make certain that the process for handling victims is as efficient as possible. Centralizing files with a single management method has enabled Quebec to improve the process and cut costs. Even without a monopoly system it should be emphasized that there is probably an advantage in having serious trauma cases centralized and treated using a common approach. In a system of free competition, serious cases are frequently covered by reinsurers. In an environment where the primary insurer is not directly responsible for payments in some accidents, there are grounds for questioning the efficiency of this modus operandi. We may wonder whether it would not be beneficial to entrust the management of serious injuries to a joint insurance/reinsurance organization in order to treat such cases with optimized expenditure and to promote, where applicable, changes in how such cases are handled. The Quebec experience highlights a significant impact on costs and a clear improvement for victims. Furthermore, the efforts made in motor accidents have resulted in improvements for victims of all types of accidents.

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A Solution for “Lifetime” Care Needs, Tasmania Philip Livingston, MAIB

Philip Livingston is the Chief Operating Officer of the Motor Accidents Insurance Board (MAIB), a Tasmanian Government Business Enterprise. He explains the way in which the MAIB operates a combined common law/no-fault motor accident scheme for Tasmanians and the scheme’s strategy for victims requiring lifetime care and support. With specially designed accommodation and rehabilitation initiatives to restore independence, the MAIB is taking a unified and cost-effective approach to the support needs of severely injured traffic accident victims.

Motor insurance in Tasmania Tasmania is an Australian island state located 240 km south of the eastern side of the continent. Tasmania’s population of approximately half a million people is distributed among four main hubs: the capital city of Hobart, Launceston in the north and Devonport and Burnie in the south. Each population center boasts an equal number of cars.

A committee was appointed to investigate alternatives to the existing scheme. The selected committee settled on a variation of the Canadian “no-fault” scheme. Their recommendation of a dual “common law/no-fault” system was accepted by both Houses of Parliament and the Motor Accidents (Liabilities and Compensation) Act was passed in 1973.

Motor insurance varies among Australian states. In Tasmania, prior to the introduction of compulsory third-party (CTP) insurance, owners of motor vehicles were not obliged to insure themselves against liability in respect of injury or death to another person brought about by the use of their motor vehicle.

The creation of the MAIB The Motor Accidents Insurance Board (MAIB) began operating on December 1, 1974 and became the single provider of compulsory thirdparty insurance (CTP) in Tasmania under a dual common law/no-fault system. The scheme is a fully funded and profitable Government Business Enterprise with annual dividends paid to the Government.

The usual practice was for an owner, when insuring their motor vehicle under a comprehensive policy, to arrange for additional cover which indemnified them from liability or injury to third parties caused by the negligent use of their motor vehicle. The lack obligation for motorists to insure their vehicles against claims for injury or death to third parties was perceived as an injustice to accident victims.

The MAIB’s mission: “To provide a commercially viable, cost competitive, high quality, personal injury insurance scheme which offers fair and equitable compensation for people injured in a motor accident.”

To address this deficiency in the Tasmanian law, the Tasmanian Traffic Act of 1925 was amended to provide adequate protection to injured third parties. This form of insurance was purely based on common law, where compensation for damages for personal injury was paid only after negligence had been proven or conceded. It was widely recognized that this system of third-party insurance had many deficiencies.

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MAIB lifetime care and support strategy In 1991, the MAIB became responsible for funding lifetime care and support for people catastrophically injured in motor accidents. The Tasmanian legislation defines eligibility for lifetime care and support as the requirement of more than two hours of attendant support per day, indefinitely, as a result of suffering personal injury in a motor accident. MAIB’s “Lifetime Care and Support Strategy” (LCSS) includes a long-term care program, designed to provide appropriate lifetime care to the seriously injured. The program provides accommodations and care for short intervals as well as longer-term periods in both northern and southern Tasmania (accommodations are subject to availability and conditions). This program ensures that appropriate care is provided to the severely injured: 86 people are now recipients of MAIB lifetime care and support and another 14 people are currently being considered for eligibility. Accommodations for the severely injured Accommodations are a critical aspect in the life plan of a catastrophically injured person. Compulsory third-party schemes that fund lifetime care and support are compelled to recognize the accommodation challenges faced by the catastrophically injured. Group residences The MAIB’s LCSS includes the construction of group residences in Tasmania’s major population centers. These group residences provide choice in accommodation, particularly for people who have suffered a traumatic brain injury.

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The MAIB’s group home model includes the construction of adjacent one-, two- and threebedroom cottage style residences suitable for respite care or for people who maintain a reasonable level of independence following their motor accident. One of the objectives of the LCSS is to foster the independence of residents. The cottage style residences allow a person progressing towards independent accommodations the opportunity to do so in a supported environment. The MAIB has three such group home complexes with a fourth opening in 2008. These modern group homes house up to six people and include the following features: • barrier-free kitchens • wheelchair friendly doorways • electric tracking hoists from bedrooms to ensuites • small sleepover bedroom and ensuites for afterhours staffing • two large living rooms providing flexibility for individual therapy sessions and private resident occasions or functions • wider carport design for improved access to specialty vehicles • level access to all areas. The MAIB group home complex also offers advantages during transitional periods when people are ready for discharge from hospital but cannot yet return home due to unfinished renovations. The MAIB group home complex allows the injured person to be discharged from hospital earlier then would otherwise be the case generating savings and the freeing up of public hospital resources.

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The group home model significantly reduces the cost of providing care and support for the catastrophically injured who choose to live there rather then in the community at large. Economies of scale are achieved within the group home model which can generate up to a 50% savings in the daily cost of attendant support for each resident compared to the attendant support cost incurred for such injured people living in the community at large. The impact on the scheme’s financial claims liability valuation can be very significant indeed. Outsourcing The MAIB outsource management of the group home complexes to a specialist provider operating under a Service Level Agreement (SLA) designed to leverage high standards of care and support. Some features of the SLA include: • value-adding attendant support aimed at assisting therapists in achieving rehabilitation goals • ensuring the injured person has a voice in the decisions that affect their home • assisting residents in integrating into community life including, if possible: – working in the community – moving to reside permanently (with the necessary MAIB support) in the community at large.

Rehabilitation The MAIB’s LCSS supports initiatives that promote the independence of the disabled wherever possible. For example, the MAIB: • Adopts an attendant care and support model that is cognizant of promoting the independence of the disabled person in their daily living activities. • Supports transition in accommodation needs from the group house to the smaller adjacent cottage style residences where the disabled person develops the level of independence to cope with such a move. • Engages providers to find community work programs for those disabled people who can participate. The support of local businesses is of course a key ingredient and it is understood by all that not every work placement succeeds as hoped. The important thing is to keep trying. Long-term view for support scheme The LCSS projects that the MAIB lifetime support scheme will mature around 2025 when the number of catastrophically injured people entering the scheme each year will be balanced by the people who no longer require lifetime care and support (e.g. those who have passed away). It is estimated that approximately 200 people will be receiving MAIB lifetime care and support in 2025. In addition, the MAIB faces a significant accommodation challenge when the parents and loved ones, currently providing support and/or housing to catastrophically injured people living in the community at large, are no longer able provide this care. Despite the obvious benefits of a lifetime care and support scheme there are risks that have to be managed carefully, including long-tail insurance risks like superimposed inflation, investment, risk, reinsurance risk and duty of care risks.

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Conclusion The Tasmanian experience is one of the very few motor schemes which combines personal injury no-fault and common law. As a monopoly insurer, MAIB is in the unique position of coordinating and funding appropriate care and follow-up for victims. This scheme provides multiple advantages, including a unified way to treat victims, a critical size providing more resources than individual companies, cost control, specific accommodations and a follow up of severely injured victims, while also supporting rehabilitation processes leading to more independence.

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Compensation Frameworks

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For the same injury, large bodily injury claim awards across Europe can vary significantly. Even within countries, disparate compensation is a recognized issue. This chapter looks at the various compensation approaches or tools from across Europe that address these differences while helping to curb the high rates of claims inflation.

page

Bodily Injury Trends in the U.K. In this interview-style discussion, an insurer shares how their company has managed to move toward a more effective, consensual claims handling approach in an environment of increasing compensation culture, accident management companies and conditional legal fee agreements. The article also covers periodical payment orders and the Ogden tables, including challenges to their respective discount rates.

French Reforms Deliver a Fairer Deal for Victims Analyses of widely disparate bodily injury damage awards in France have led to a number of specific improvement recommendations. This article reviews two notable steps: a classification proposal to foster uniform compensation criteria and a reform of social security legislation to improve victim rights.

The Baremo and the Consorcio, Spain Spain has two market solution examples. The Baremo is a mechanism that consistently and clearly evaluates motor bodily injury compensation for victims while also enhancing insurance reserve stability. The Consorcio is a public compensation pool for property catastrophe loss that also covers non-insured motor third-party liability.

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Finlandâ&#x20AC;&#x2122;s Streamlined Approach In Finland, motor bodily injury compensation is quick, centralized and highly standardized. Notable features include the fact that most expenses are first and foremost paid by the insurer, and the Insurance Rehabilitation Association, which helps insurers in the preparation, management and harmonization of rehabilitation matters.

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26.6.2008 20:59:04 Uhr

Bodily Injury Trends in the U.K. Daniel Miles, Norwich Union; Robert Boghos and Eugene Balogh, PartnerRe

This is a transcript of a discussion between Daniel Miles, Senior Claims Manager at Norwich Union, and Robert Boghos and Eugene Balogh, Senior Underwriters in Property & Casualty at PartnerRe. Daniel Miles gives an overview of the main issues and trends associated with bodily injury claims in the U.K., including the increasing compensation culture, accident management companies, conditional legal fee agreements, “whiplash” claim frequency and periodical payment orders1. He also explains how Norwich Union’s constructive and consensual claims approach, involving early and appropriate advice and medical treatment, ensures that claimants receive optimal value from their insurance.

What bodily injury claim trends has Norwich Union observed in the U.K. over the past five years? Compensation culture has increased in the U.K. over the past few years and many solicitors are specializing in soft tissue injuries (whiplash), which is the lucrative end of their market. There has also been growth in the number of accident management companies. These companies advertise in the media and you often see people on streets handing out leaflets to accident victims, encouraging them to make claims against insurers. The claimant’s solicitor pays the accident management company a referral fee. Accident management companies often target individuals after a major crash in hospital wards asking them if they want to make a claim. They may also have links with credit hire companies to provide hire cars that the claimant will not have to pay for. There are also moves to provide rehabilitation on a credit hire basis: if the injured person is himself liable and cannot recover, he will not be further contacted by the accident management company. The introduction of compulsory fitting and wearing of seatbelts has reduced the number of facial injuries. We see more specialist solicitors with “catastrophic bodily injury” departments. Solicitors who are not experts in bodily injury pass these cases to specialists for a referral fee, though some still handle cases beyond their ability. We prefer to deal with a specialist who knows how we operate 1

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which results in a better dialogue. There are now experts in all elements attached to a claim such as accommodation, equipment and care, which can fuel the litigation aspect of the case if one is intent on an adversarial approach. We aim for a more consensual approach in the early stages of a claim. Ten years ago, it was very adversarial; we hardly talked to the other side and then only via solicitors, claims were rarely settled out of court. Today, the opposite is true. How can the accident management companies detect if a claimant has a case in which liability is likely to be established? They ask a few personal questions regarding the incident and who they consider to be at fault and pass it on to a solicitor to investigate. We do not know if the fee depends on how successful the outcome of the claim is. Accident management firms in the U.K., coupled with claimants looking to maximize their awards, accelerate compensation culture. We’ve also seen a withdrawal of legal aid over the last few years and growth in conditional solicitor fee agreements. Conditional fee agreements increase overall costs, so at the lower end we see a disproportionate level of costs in relation to the award paid. There are also “after the event” insurance policies which can be taken out by a claimant to fund a compensation claim.

There has been some legal development since this discussion was held in 2007 which affects periodical payments; a brief explanatory comment and footnotes have been inserted into the relevant text.

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Can we learn anything from the Irish model – the Personal Injuries Assessment Board (PIAB)? The Irish model is still being reviewed and it is too early to say. There are pro and anti PIAB campaigners. It has a place for claims of a certain size, but it is not clear if it fits all types and values of claim. The Irish market is much smaller and to transfer U.K. claims onto a similar base would be difficult. The benefit of PIAB is that you have one assessment, one treating consultant, one assessor and one compensation system. In contrast, in the U.K. you have the adversarial system with two parties telling an injured individual what he should be claiming for. Norwich Union is trying to break down the barriers of the adversarial approach and become more consensual to deal constructively with a person’s injury while speeding up the process. Wouldn’t it be a positive move to divert more of the available funds to the injured person rather than to the legal system? There has been a change in the legislation of small claims. Claims are currently considered within different financial brackets: • Small Claims Track = claims up to UK£ 1,000. Legal fees are fixed to cost of medical report or, if litigated, the cost of the court issuing fee: normally UK£ 80 + medical report. • Fast Track Claims = claims up to UK£ 15,000. Legal fees in this category are dealt with by “predictable fees”, i.e.: claims up to UK£ 5,000. A claimant’s legal fees would be restricted to UK£ 800 + 20% of the damages. • Multi Track Claims = claims in excess of UK£ 15,000. Legal fees are considered on a case by case basis. The above limits are currently under review, in particular the Small Claims Track which may increase to UK£ 2,500–5,000. This is also a social responsibility. Are insurers making more effort to take care of their claimants?

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Insurers are trying to take care of injured parties and to change the public’s poor perception that “insurers always take the premium but pay out the minimum”. A consensual approach cuts claims costs and reduces the life cycle of a claim by delivering what is required. For example, if an insured needs 24/7 care, we pay for it. We avoid where possible paying for future losses, including care and accommodation, based on hypothetical expert reports which can unnecessarily inflate a claim, e.g. five star-hotels. A seriously injured claimant wants 100% recovery rather than more money so we attempt to deal with this. This is Norwich Union’s approach and other insurers (and lawyers) are following suit. It is generally accepted that this is the way forward. The Government is encouraging both parties to reduce the adversarial elements by talking. Your leaflets “Norwich Union’s PatientCentered Approach” and “Coping with injuries that change your life” are interesting. These leaflets pass on our intentions to the injured party because we do not know what message is passed on from solicitor to client: they show that Norwich Union is more than an insurer paying the absolute minimum, that we offer levels of support and that if the claimant talks to us, we will do our best to deal with all their claims issues and needs. Does Norwich Union contact the third party affected by their insured if they hear about an accident in the media? We’ve tried this when we have been aware of an incident such as you describe. Generally, although we may know that the victim is seriously injured, the hospital and police cannot in fact release details due to the Data Protection Act, so it is often only by chance that we find out. The few cases where it has happened have been with Employers Liability cases, when the policy holder contacted Norwich Union with details of the affected employee. In one case, the injured party only used the solicitor to confirm that our assessment of quantum was reasonable.

26.6.2008 21:01:47 Uhr

What are the other initiatives in the U.K. market for managing large bodily injury losses? Does Norwich Union have any other initiatives of its own? Many other insurers have taken our approach on board and we regularly meet with them. A major problem in employer’s liability cases is contacting the injured party early enough, as we have to wait for the employer to contact us and the average notification time is nine months, which is difficult to explain. Motor claims tend not to have this problem if we are able to identify the passengers. Do the Ogden tables help or distort bodily injury claims? Ogden tables, created by Sir Michael Ogden in 1984, are a method of calculating future losses. Before Ogden, both insurers and solicitors calculated their own value of future losses and negotiated a settlement. The Act of 1996 established the Ogden tables as being the recognized method of calculation, and since 1996 the courts, insurers and lawyers have adopted the Ogden tables to calculate future loss. The Lord Chancellor set the discount rate in 2000/1 at 2.5% (as from 1996 it had been 3.5%). Ogden tables provide a recognized way of handling claims for future loss with everybody working on the same format. There are varying views as to whether the discount rate is the correct rate as it not only applies to lump sum settlements but also has an impact on periodical payments. With the lump sum you have the investment opportunity and if you can achieve a return of greater than 2.5% then you will gain and vice versa. Comparing the “pre-Ogden” approach to the Ogden tables, have compensation levels increased? They’re similar, because the investment rates in 1996 and before were higher. Ogden basically ensured a consistent approach to the calculation of future losses. Obviously the change in the discount rate from 3.5% to 2.5% increased claim settlements.

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Prior to 1996, care elements were not as high as they are today. Care costs are now driving up the index of Periodical Payment Orders (PPO). Ogden stabilized the system and everyone works with the same figures. We were the leading insurer in the case of Shepherd & Stibbe in 2002 when the discount rate was challenged. The court of appeal upheld the discount rate at 2.5% on a lump sum basis. Since then, the claimants are challenging the Retail price Index (RPI) of the PPO, which is roughly the same argument. It remains to be seen how courts will resolve this issue. The only discussion point on the Ogden tables is the discount for elements other than mortality, i.e. someone who has a reduced life expectancy. What about the sixth edition? The big change is how future earnings losses are calculated because they offer a bigger discount if the individual was not previously working. Depending on educational background, you apply a different discount to the multiplier, which has a slight impact on future wage loss. We estimate that this change will result in a cost neutral position. Can you comment on any trends in soft tissue injury (whiplash) in the U.K. over the past five years and in your portfolio? Soft tissue injury is an aspect that we have seen grow for a number of years now. Thirty years ago we saw very few soft tissue claims; unless there were broken bones, people generally did not bother to claim. We were then dealing with UK£ 25/50 excess for someone hiring a car. We are now seeing more whiplash claims due to Accident Management Companies, the way claims are referred, and the way lawyers work. About 80% of our current bodily injury claims are whiplash claims (roughly 50,000 out of 60,000).

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Could it also be that 30 years ago the opinions of doctors were not as frequently challenged? Possibly, but the compensation elements and the way that society has changed, are probably the biggest drivers of this increase. A few years ago, insurers in some countries handled “whiplash” claims by paying a fixed final amount. If a doctor’s report confirms soft tissue injury and recommends the claimant receive automatic compensation, would Norwich Union still want further evidence? We give our third party call centers some autonomy as to whether to ask for more medical evidence or to conclude the claim on the basis of the initial information given. We offer treatment at first, rather than money, and if this is refused we scrutinize the claim more closely. We find that normally it takes four or five physiotherapy sessions to optimize someone’s recovery. Accident management companies will pay for up to 10 to 12 sessions, yet we see the same results with only four or five. We have contracts with many physiotherapy firms in the U.K., so we can offer physiotherapy as soon as “whiplash” claims are referred to us. However, in the U.K., the claimant has three years to make a claim, so there is little incentive to notify the insurer early on. Unless we can reduce the notification period we will always be struggling in those circumstances. That’s crucial with “whiplash” claims; if treatment is given in the first month, the chances of recovery are much higher. In our “whiplash” program from October 2006 to June 2007, we handled 6,500 injured parties and 51% of those recovered using telephone support, self-help medical advice from a qualified clinician, for example advising them on how to exercise. 49% have undergone physical therapy with an average program of five sessions with a life cycle of 47 days. This is cost effective. As for the treatment cost alone there is a saving of about UK£ 164 per case, which is substantial. We do not know how many of the physical therapy cases

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went on to claim, but overall the number of claims is decreasing since we started the program. It is possible that a small number of those 51% who were making the claim by phone were not in fact injured, and that once they realized that our first response was to offer them treatment with a recognized expert, they decided not to pursue the claim. Are there more large bodily injury losses for motor or employer’s liability? Is there any discrepancy between compensation levels for the same injury? The Norwich Union large bodily injury claims unit deals with identical injuries for motor or employer’s/ public liability in exactly the same way. The only difference comes from the period of time that has generally elapsed since our claims team is aware of the claim; generally, motor claims are advised earlier. We often deal with a union solicitor whose processes are normally longer than a solicitor handling a motor claim. There are a lot of motor bodily injury claims above UK£ 5 million, but not as many for employer’s/public liability, and I can’t imagine that motor claims are more severe? We see some large bodily injury employer’s liability claims involving significant head injuries, but not that many. When liability is established and we know the injury, the approach should be exactly the same for motor and employer’s/public liability. The same compensation is offered for general damages, the same considerations for accommodation for loss of earnings, etc. We would also deal with solicitors costs in the same way, there’s just a higher volume of motor claims.

26.6.2008 16:18:43 Uhr

Apart from the U.K. Courts Act 2003, has the U.K. regulatory environment changed over the past few years? The introduction of the Pre-action Protocol incorporates the rehabilitation code so insurers and solicitors have to consider rehabilitation. The Association of British Insurers (ABI) and the U.K. Government are encouraging both parties to be more consensual. There is also the change in the DWP with regards to recovery of health benefits, “the National health Service clawback”, which now includes employer’s liability cases. Insurers can now offset contributory negligence in that recovery. Other than that, the Government is continually reviewing its policy. Inserted comment by the editors regarding developments subsequent to this discussion Since this discussion took place, the decision to use the ASHE 6115 figure (rather than the Retail Price Index) for future care costs in periodical payments in the case of Thompstone vs. Tameside & Glossop Acute Services NHS Trust was upheld by the Court of Appeal (January 17, 2008). This will lead to upward reserve adjustments for claims with significant care cost components and raises funding issues (ASHE 6115 annuities are currently not available). Periodical payments – will this affect any trends in large bodily injury losses? PPOs were pushed by several insurers, by the National Health Service (NHS) and the Motor Insurance Bureau as the fairest way of handling compensation claims. The index for annual increases was set at the Retail Price Index (RPI) and PPOs are always part of our negotiation process subject to that index. We are now seeing the challenge to the RPI index in the case of Thompstone and others going to the Court of Appeal in November 2007. They are all NHS cases; there are no insurance cases as yet in that

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appeal process. We are opposed to paying more than the RPI in respect to PPOs. I suspect the future popularity of PPOs will depend on theoutcome of these appeal cases2. PPOs were attractive a few years ago when interest rates were high and you could get quite competitive annuity rates on structured settlements. At present there are few insurers doing their own structured settlements. Premiums for impaired life annuities in the U.K. are currently not competitive for PPOs. Could other indices be used? Different elements would then be the main drivers of the indemnity, e.g. nursing or accommodation. A whole range of different indices affect future losses and the RPI has been used for simplicity as it encompasses everything (accommodation, wages, etc.). At the first review of a PPO, if you have ten heads of claim for future loss each with a different index, then you have a more complex calculation, which costs more to evaluate. RPI applied to all cases seems equitable as everyone is treated in the same way. There are numerous arguments on both sides as to how future loses should be calculated and which index is the most appropriate. It is now in the hands of the Court of Appeal and possibly the House of Lords to make a final decision2. Are PPOs more socially equitable as monthly payments take care of the claimant’s needs rather than a lump sum? Insurers prefer to pay an injured individual on an ongoing basis for what they actually require, for example, 24/7 care, accommodation, etc. The difficulty is to assess whether the care or equipment is actually used. In the case of a lump sum, quantum is based on a report where its recommendations are seldom put in place; the money goes to the claimant/their family and is rarely delivered in the way intended.

The use of ASHE 6115 for future care costs in the Thompson case was upheld by the Court of Appeal (January 17, 2008).

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27.6.2008 16:24:53 Uhr

To enable a compensator to provide a full indemnity to an injured claimant, there would have to be a change in legislation allowing some form of periodical payments to pay for the future care and losses that are actually incurred. The Government is currently considering a possible change to the way that compensation claims are assessed, and it remains to be seen how far ranging these changes will be. Given that courts are expected to award PPOs mainly for cases involving “minors” and “patients”, will the Mental Health Act’s provisions on receivership promote PPOs? It’s too early to say. Once a Receiver is established they have a responsibility to The Court of Protection to administer the payments. There are now professionals offering this service who charge fees for this. The more complex and expensive the case, the higher the charges. Some annual Receiver fees are UK£ 10,000 plus, so you can see how expensive this can be. With the ongoing payments of PPOs, the fee to the Receiver is less as the responsibility is reduced. In that case, is there more of an incentive to go for the PPO? It depends, some opt for a lump sum even for a child. We have seen several cases recently, all approved by the Court. The courts have the authority to take a different view if they feel that the parents are not sufficiently responsible to do this. Can a court state that the parents are unfit and the administration will be dealt with by a Receiver? Yes, the solicitor also has a duty to advise this. The solicitor advising the family normally acts as the Receiver and we are seeing solicitors with their own investment/receivership departments and any other relevant service. They do not however make money on PPOs because they lose the investment opportunity from the lump sum.

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Why is the NHS being challenged on the indices for PPOs in the cases of Thompstone vs. Tameside & Glossop Acute Services NHS Trust 2006 and Corbett vs. South Yorkshire Strategic Health Authority 2006, while insurers have so far not been challenged? The NHS cases going to the Court of Appeal are catastrophic cases, involving birth defects and cerebral palsy with very high levels of care and involving very young claimants. The NHS has a significant number of these cases, far more than any insurer. It’s that type of case that the claimants lobby on and these may attract a Court to adopt an index higher than the RPI. In addition, the NHS is a government body, which also pushed PPOs. Insurers generally adopt a more consensual and proactive approach to encourage people to sit round the table and look at the issues with regards to long-term care, which assists in achieving an amicable settlement and avoids additional adversarial costs. Say litigation culture in the U.K. follows the U.S., could we see the RPI challenged in the courts and then increased? We always aim to resolve the issues at an early stage by understanding the claimant’s needs. In the early stages of a case where we have a liability for a seriously injured claimant, our aim is to assist in optimizing his recovery and dealing with his future needs whatever they may be. At that stage we are not concerned on what basis settlement will be agreed. From the claimant’s perspective, if his care needs are met, he is not worried whether there is a four or a six in front of the six zeros, he just wants an appropriate package that is fair and deals with his and his family’s aspirations. No two claimants are alike; you may have two claimants with spinal injuries but their needs and aspirations may be different, the way they manage that injury may be different, etc. Unless you meet the claimant you have no idea what is appropriate.

27.6.2008 16:26:28 Uhr

The Flora vs. Wakom case is a good example of this; the claimant just wanted to receive compensation rather than fight further. Insurers need to understand the claimantâ&#x20AC;&#x2122;s motivations: they do not want newspaper headlines or to leave the court waving a big check. They want the best compensation package. If we can talk with the claimant and their lawyers we can usually achieve this. In addition, in the U.K., we need to establish liability. If we are dealing with a case where our policy holder is only 50% liable this creates a whole new dimension. Most people in the U.K. do not understand how compensation claims work, in that they have to establish a meaningful degree of liability to successfully purse a compensation which can be discounted by their own contributory negligence. In certain cases, we can take into account state funding in our settlements, which gives you an option when dealing with the liability split. If you are only 50% liable and if you can encourage the NHS to contribute, a workable settlement package can still be achieved. Say the future damages element is over 50% of the claim, with contributory negligence of 50%, this element will be halved in the case of a PPO. Who will pick up the other 50% in these cases? The NHS, in certain circumstances, will contribute to these costs and it is important that we attempt to meet the claimant and his solicitor early on to find solutions if they recognize that they will not recover 100%, It is doing a deal at the end of the day; if we can remove the adversarial elements and settle the claim early, we may be more generous in the package as this is also cost beneficial to us. The solicitor would still get full fees.

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26.6.2008 16:18:43 Uhr

French Reforms Deliver a Fairer Deal for Victims Yvonne Dulong, PartnerRe

Improving a national compensation system involves detailed recognition of the existing problems and a clear means of instigating the necessary amendment. Yvonne Dulong, Claims Specialist at PartnerRe, explains compensation reform and proposals in France, together with the supporting findings and recommendations.

Introduction French legislation governing occupational1 and traffic2 accidents and medical errors3 is based on separate evaluation rules (medical scales), resulting in wide disparities in the damages awarded to victims. The various courts and government bodies (judicial or administrative), depending on their location, have also played a role in increasing these disparities. The situation has been perceived as unfair by victims and contributing to a climate of uncertainty for insurers and reinsurers, who are faced with high claims inflation and unpredictable claim amounts.

Summary Findings of the National Council for Victims Aide5 (Working Party II): bodily injury valuation Implementation of a scale as a reference tool by professionals, attorneys, doctors and claims adjusters The working party criticized the use of disparate scales to assess bodily injury:

In 2002, the French Minister of Justice submitted an action program in favor of victims to the Council of Ministers. The following three working parties were created:

• medical scale used by doctors • health insurance system scale • scale for medical errors, used by courts to evaluate non-economic damages.

• emergency compensation to victims (Working Party I) • bodily injury valuation (Working Party II) • support measures and compensation procedures for victims of collective accidents (Working Party III).

In a single accident, a victim may be faced with several systems, each using a separate scale and delivering a different rate of disability. The working party proposed the development of an EU-wide medical scale, to be prepared under transparent, impartial and neutral conditions.

This paper concentrates on the recommendations of Working Party II, which submitted its findings in June 2003. These, upon the recommendations of another working group, led to the proposal of a bodily injury classification (the DINTHILAC nomenclature) contingent upon a mandatory reform of the National Health System right of recovery by law. Elements of both were included in the French Health Insurance System Budget Act 4.

Creation of a heads of damage list While Nordic and English-speaking countries have always drawn a distinction between economic and non-economic loss, it has not always been the case in France, where compensation was previously understood to be comprehensive (all categories of injury combined). Various statutes subsequently mandated that compensation be itemized by head of damage; this has been applied for traffic accidents.

1 2 3 4

Act of April 9, 1989 Act of July 5, 1985 Act of March 4, 2002 Act 2006-1640 of December 21, 2006

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Despite a few outstanding interpretative issues, this Act has removed many of the earlier difficulties surrounding bodily injury compensation.

Conseil National d’Aide aux Victimes (CNAV)

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The main recommendation from the working party was for a wide and detailed classification table based on economic and non-economic damage components, with room for maneuver to set up new heads of damage in exceptional cases. To ensure its application, a corresponding statute or regulation would be required (not yet passed). Creation of a nationwide, adjustable and statistical benchmark 6 For non-economic damage (“non-pecuniary loss”), working party participants rejected the idea of a scale assigning monetary value to each injury described in the medical expert’s assessment, seeing this as a measure that would impinge on the freedom of judges. Victims’ rights groups and attorneys have also opposed such a scale, on the basis that non-economic damages can be too subjective and personal to be arbitrarily set. However, many French appellate courts already use their own (different) unofficial scales that provide judges with a reference grid to avoid disparities within the same court and government body. Rather than a scale solution to this issue, the task force recommended the development of a non-mandatory benchmark for non-economic damages that would allow for a degree of flexibility in valuation and whose statistical bases (court decisions and out of court settlements) would allow it to evolve. It would apply to all kinds of accident and would be published annually and circulated broadly, especially to the French appellate courts7.

6 7

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Known as RINSE in France. As of January 1, 2006, the Impairment to Physical and Psychological Integrity (IPPI) medical scale guide has been the official scale for assessing the after-effects of workrelated and personal accidents for European civil servants.

Annual publication of compensation capitalization scale The compensation of future damages (i.e. future expenses, the loss of future income and often the need for a caregiver) is usually capitalized. This calculation is based on a capitalization scale consisting of an interest rate and life expectancy derived from mortality tables. Unfortunately, some French courts and government agencies were using outdated mortality tables (sometimes even those dating back to the Decree of August 8, 1986 with an interest rate of 6.50%). The working party recommended the annual publication of a compensation capitalization scale based on the present value of an official interest rate and the latest statistical life expectancy evaluations published by the French national statistics agency, INSEE8. Amendment of Article 31 of the French law of July 5, 1985 (Badinter Act) and Article 376 -1 of the French Health Insurance Code concerning recourse to third-party payers The Badinter Act of July 5, 1985 gave the public health system a subrogation right against the insurer of the liable party for paid economic damages. The working party proposed that amendments be made to put an end to this situation. Such an amendment was included in the Health Insurance Budget Act of December 21, 2006.

Institut National de la Statistique et des Etudes Economiques

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The DINTHILAC report A committee was appointed in 2005 with a mandate to prepare a bodily injury classification in order to foster uniform compensation criteria. Specifics features of the committee’s proposed nomenclature are presented in the DINTHILAC report. Basis of the classification The classification was based on a re-examination of: • The proposals of Working Party II. • Recommendation of the Academy of European Law in Trier, which emphasized the need for governments to set up systems for the compensation of personal injury that distinguish between economic and non-economic damage. • The European Parliament’s report of August 27, 2003, containing recommendations for a European scale to valuate bodily and emotional injuries, and on the actual European Scale of May 25, 2003, which already applies to European Union civil servants. Characteristics The model includes the following distinctions: • injuries of the direct victim vs. those of the indirect victim • economic vs. non-economic damages • temporary injuries (before the end of convalescence) vs. permanent disabilities (after the end of convalescence, i.e. when injuries become permanent).

In addition, the following categories were created: • Exceptional permanent disabilities (such as in the case of a Japanese man whose backbone was injured and who could no longer bow). • Non-economic loss for illnesses related to progressive pathologies where the notion of healing is not applicable, especially hepatitis C, HIV, and Creutzfeld-Jakob disease. • The notion of partial disability, which previously referred both to physical loss (bodily injury) and economic impact (economic loss) and which was classified in the category of damages subject to third-party recourse, becomes a permanent loss and falls into the category of non-economic losses which accordingly fall outside the scope of third-party payer recourse. This is something that victims’ rights advocates have sought for years. The nomenclature was published by the High Court and circulated by the Ministry of Justice to all French courts and government agencies. It has been recommended and approved, and is expected to enter into effect as recommended by the May 2007 Ministry of Justice Circular, although this has not yet happened. Its effective implementation necessitated mandatory reform of third-party recourse provisions; this was achieved in the December 21, 2006 Health Insurance Budget Act.

The list of injuries in the classification is not exhaustive but rather functions as a reference guide that can be enhanced with additional heads of damage.

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26.6.2008 16:18:44 Uhr

Health Insurance Budget Act, 2006 amendment This 2006 amendment to French Social Security law introduced two important reforms: Category by category third-party payers right of recovery Third-party payers recourse must now be applied category by category. Preferential rights of the victim over thirdparty payers The law also mandated a priority for victims over third-party payers when benefits are not fully compensated for a given head of damage (normally the case when liability is shared). Application difficulties Case law of the Appeal Court of Paris has upheld the following issues. Date of application Since the Act contains no provisions as to its effective date, the question has arisen as to whether it applies to open claims. This looks to be the case as four rulings handed down by the Paris Court of Appeal (17th Chamber, February 19, 2007) deem the law applicable to current cases, as did the Council of State, June 4, 2007, and a circular issued by the Ministry of Justice dated May 2007. Scope of application Does the reform apply to all accidents (traffic, medical liability, industrial accidents) and to all third-party payers? Does it apply to all courts and government agencies? Since political and business interests come into play (including the budget deficit of the French public health system), we must wait for opinions from the ministries involved. However, the Paris Court of Appeals (17th chamber) has already ruled that the Act also governs occupational accidents (May 7, 2007).

The issue raised by some benefits such as occupational accident annuities The occupational annuity is unusual for industrial accidents as it compensates for both non-economic and economic losses. However, third-party payers make no such distinction. The DINTHILAC committee suggested a breakdown of the recovery into economic and non-economic loss components. Failing such a breakdown, the committee proposed application of a 50-50 allocation. Victims’ overriding rights Legal experts are divided as to the allocation of compensatory damages, but most legal experts, including Working Party II and victims advocates, feel that the victim should in some cases be able to obtain more than his/her claim as a result of adding both the health insurance benefits and his/ her overriding compensation for pain and suffering. Conclusion In conjunction with the DINTHILAC nomenclature, the 2006 Social Security Act amendment constitutes a breakthrough in bodily injury compensation: the Act allows an increase of compensation rights for victims by granting them a overriding right over third-party payers, and by categorizing injuries via a detailed and open list of heads of damage. However, because of the aforementioned difficulties of interpretation, efforts to remove disparity from the various systems involved will continue. In April, 2008 the AFA9 accordingly submitted a paper10 on bodily injury issues including improvement proposals.

9 10

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Association Française de l’Assurance “Livre Blanc sur l’indemisation du dommage corporel”

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26.6.2008 21:12:44 Uhr

The Baremo and the Consorcio, Spain Almudena García Pérez, Linea Directa

Almudena Garcia Pérez is an actuary responsible for reinsurance at Linea Directa, the Spanish subsidiary of the U.K.’s Direct Line insurance company. She presents the Baremo and the Consorcio, two features of the Spanish motor insurance market which differentiate it from most other European markets. The Baremo is a mechanism that consistently and clearly evaluates motor bodily injury compensation for victims, while also enhancing insurance reserve stability. The Consorcio is a public compensation pool for property catastrophe loss that also covers non-insured motor third-party liability.

Introduction The Baremo is a specific standard set up 12 years ago to avoid excessive liability claims inflation and variation, in particular for large bodily injury claims. The Consorcio is a public compensation pool whose main role is to provide cover to the property market for exceptional events, while also covering motor losses resulting form such events and noninsured motor third party liability.

Figure 1 Number of non-urban, fatal motor accidents from 2004 to May 2007, showing an overall year-to-year decrease. Source: Dirección General de Tráfico.

As regards loss trends, despite a rise in number of vehicles, the number of fatal accidents decreased, in particular since the summer of 2006 (figure 1). There were also reductions in the number of seriously injured over this period (figure 2). The main reason for the improvement appears to be the “penalty points driving license”, applied as of July 1, 2006.

350 300 250 200 150

2004 2005 2006 2007

100 50 0 Jan

Figure 2 Number of fatal, seriously injured and minor injuries from motor accidents in Spain over the period 2001 to 2006, showing an improving trend. Source: Dirección General de Tráfico. 2001 2002 2003 2004 2005 2006

Feb

Mar

Apr

Jun

Jul

Aug

Sep

Oct

Nov

Dec

4500 4000 3500 3000 2500 2000 1500 1000 500 0 Fatal victims

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May

Major injured

Minor injured

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The liability covers Spain had compulsory liability quantitative minimum limits for motor vehicles insurance of € 350,000 per victim for bodily injury and € 100,000 per claim for property damage. In addition to compulsory liability, the insurance market also has voluntary motor liability coverage. Until 2003, cover was unlimited. However, since April 2003, the market reached an agreement for a maximum limit of € 50 million per event. Subsequently, in July 2007, the 5th Directive was incorporated into Spanish law and came into force in January 2008. This law established higher compulsory minimum limits: € 70 million for personal injury and € 15 million for accidental damage. The Baremo: a special feature for bodily injury liability The Baremo is a framework to evaluate personal injury compensation arising from motor accidents. It was instituted in November 1995 into insurance law in order to avoid arbitrary indemnities and to achieve an equitable valuation of compensation. There were some initial adaptations, but since 2000 the Baremo is fully applied by the courts. It covers every Spanish region and has not suffered any significant change since that time. The most notable aspects of the Baremo are: • The sums established include psychological harm but exclude medical or long-term care expenses, and burial and funeral costs. • It does not consider loss of future earnings; indemnity for this concept is evaluated separately. • The right to these compensations applies in the case of death, permanent disability or temporary incapacity of the injured party (the beneficiary, except in the case of death where the beneficiary is the direct relatives, i.e. spouse, siblings, parents, children of the injured party). • In case of permanent disability, the injury is evaluated based on a scale with a point system (from 0 to 100). The relevant law indicates the

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range of points corresponding to each injury (see Appendix for examples). Within this range, the exact number assigned to the victim depends on the medical evaluation, pre-existing injuries or injuries not related to the accident. • The value in euros awarded for each point depends on the age of the victim, whether they have children, the age of any children, marital status, salary, etc. The Appendix to this article includes examples of the quantities fixed by law to determine the final indemnity for 2007. • The amounts are annually updated according to the retail price index, ensuring that every claim, severe or not, has the same inflation. There is no specific inflation factor applied for large claims. The Consorcio In Spain, loss and injury caused by catastrophic events (both natural and some socio-political acts) is covered by a public compensation pool, the “Consorcio de Compensación de Seguros”. Cover is conditioned to subscription of an insurance policy in one or several lines of insurance for which current law provides the obligation to include cover for catastrophic events. The covered natural catastrophe events are: extraordinary flood, earthquake, seaquake, volcanic eruption, atypical cyclonic storm and fall of sidereal bodies and meteorites. The socio-political acts covered are: events violently caused as a consequence of terrorism, rebellion, sedition, riot or civil commotion. The Consorcio also assumes compulsory cover of civil liability insurance for motor vehicles not accepted by insurance companies. Catastrophe events not covered include hail and rain. The importance of these risks is not high, and most companies retain this risk on their own balance sheet.

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Conclusion The most prominent feature of the Spanish motor market, the introduction of the Baremo, although controversial at the time, has been a real success. It is well accepted by society and judges in Spain, and in fact courts are now applying it to set indemnities not only for motor accidents, but for other accident injuries, such as industrial. In addition to slightly reducing the average claims cost, the Baremo system has given victims a better visibility of the indemnities in several classes, and insurance companies more stability in their reserves procedure by reducing the uncertainty of claims cost. This is an essential feature for both insurers and reinsurers.

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Appendix Valuation of consequences from motor accidents. All figures are in euros. Source: Linea Directa Death of a married person (including psychological harm) Age of the victim < 65

Age of the victim 65–80

Age of the victim > 80

To the spouse

99,223

74,417

49,611

To the children: – Younger than 18 years old – Between 18 and 25 – More than 25 years old

41,343 16,537 8,269

41,343 6,201 4,134

8,269

41,343

To the parents To dependent brothers/sisters

Some correction factors in case of death 1. A function of the victim’s earnings

Increasing percentage for higher salaries

2. Disabled or handicapped beneficiary

Increasing percentage for higher levels

3. Both parents dead in the accident

Depends on the age of the children

4. The victim is pregnant

Depends on the development of the foetus

Permanent disability (including psychological harm) The total indemnity is the product of the number of points allocated and the values listed by age group in the above table. Points

Age < 20

21–40

41–55

56–65

> 65

735

681

626

576

516

812

746

680

630

541

10 –14

886

809

732

681

565

50 – 54

1,906

1,756

1,606

1,475

998

90 – 99

2,892

2,670

2,448

2,242

1,442

100

3,005

2,774

2,544

2,329

1,492

Some correction factors in case of permanent disability

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1. A function of the victim’s earnings

Increasing percentage for higher salaries

2. Disability for current occupation

Increasing percentage for higher levels

3. Permanent total disability

Need for long-term care

4. Home or vehicle adequacy

Limited amounts

5. The victim is pregnant

Depends on the development of the foetus

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Temporary incapacity (including psychological harm) Sick leave Days in hospital

Days not in hospital

Correction factor in case of temporary incapacity A function of the victim’s earnings

Increasing percentage for higher salaries

Some examples of personal injuries rated by the Baremo Source: Linea Directa Short description of the injury Loss of a tooth Non-serious epilepsy

1 1– 10

Vertebra fracture (no spinal effects)

30– 40

Loss of limb

55– 60

Permanent vegetative state

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Points

100

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100

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Finland’s Streamlined Approach Janne Jumppanen, Finnish Motor Insurers Centre

Janne Jumppanen is director of the Insurance and Law Unit at the Finnish Motor Insurers Centre, which acts as a Bureau liaison, statistical data provider and uninsured drivers Fund for Finnish motor insurers. In this paper, he explains some specific and sometimes unique characteristics of the Finnish system for motor liability. In Finland, motor liability is essentially strict, the scope of insurance cover is extensive and the insurer is the primary compensator with respect to all statutory benefits. Bodily injury is correspondingly compensated in a quick and centralized way and is highly standardized. Other aspects of the Finnish system include the Insurance Rehabilitation Association, which helps insurers in the preparation, management and harmonization of rehabilitation matters.

Introduction International insurers often find it difficult to grasp the Finnish motor liability insurance. Even if we talk about the same issue in principle, misunderstandings are inevitable. In a Nordic welfare state, conventional risk-based motor liability insurance has been extended and is effectively now almost a social security system. Second-oldest compulsory motor liability insurance In 1925, Finland became the second country in the world after Denmark to enforce compulsory statutory motor liability insurance. Legislation developed gradually and, as a result of Nordic cooperation in motor liability insurance, legislative initiatives were prepared simultaneously in various Nordic countries. In Finland, the Motor Vehicle Liability Act of 1937 was replaced by the current Motor Liability Insurance Act (26 June 1959/279), which entered into force on January 1, 1960. Final legislation in the various Nordic countries differs by detail and date of effectiveness. There have been even greater differences in terms of insurance system funding and other key details.

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Strict liability Finland transferred away from a system based on general liability insurance when it adopted the current motor insurance liability legislation. The key principle of the act is objective or strict liability, and it is this that makes the Finnish motor insurance system almost a “social security system” for road accident victims. According to the law, a road accident is compensated for even if no one is personally obliged to pay damages based on the use of a vehicle on the road. The only requirement for paying damages is that the vehicle has been used on the road and that it has a causal connection with the damage that has taken place. For example, people who have been run over by a car, regardless of their age, are entitled to compensation by virtue of the vehicle’s motor liability insurance. Since 1980, it has been possible, but only in exceptional cases, to reduce the amount of compensation due to the injured party’s own conduct or to deny compensation altogether. According to subsection 1, section 7 of the Motor Liability Insurance Act, if someone has intentionally caused him/herself a bodily injury, compensation is paid only as far as other circumstances have had an impact on the injury. According to the same section of law, if someone has through gross negligence contributed to the personal injury that he/she has suffered, compensation can be reduced or denied within reason, taking the circumstances into account.

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The principle of strict liability is not applied if the road accident caused by the vehicle is aimed at another motor vehicle, a vehicle running on rail or a person or property in such a vehicle. The general liability insurance system in Nordic countries treats children, the elderly or other special groups more leniently with respect to fault than so-called normal road users. Other countries are still debating this principle; drafters of the 5th Motor Insurance Directive1 wanted to include the principle in the directive, but this remains disputed. Driver’s place protection So-called driver’s place protection is a special motor liability insurance feature in all Nordic countries. Based on compulsory statutory insurance, the insurance cover of the owner and driver of a vehicle are the same as for a third party. Since 1968, all Finnish motor liability insurance policies include driver’s place protection. After joining the European Community, legislation was harmonized to correspond with the content of the motor liability insurance directives. These directives are based on motor liability insurance operating on the basis of general liability and do not take driver’s place protection into account. Compensation Unlimited liability for bodily injury In the Finnish system, compensation for personal injury is unlimited. In terms of material damage, the Motor Liability Insurance Act stipulates that the total compensation for one road accident or several road accidents that are directly linked to one another is a maximum of € 3.3 million per policy. This deviates from the system created by the motor liability insurance directives in which certain minimum, as oppose to maximum, limits are specified.

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Distribution of damages According to section 14 of the Motor Liability Insurance Act, insurance companies have joint liability for compensating for personal injury; i.e. if an injured party is entitled to compensation from two or more motor liability insurance policies due to a single road accident, the companies are liable for their own part and on behalf of each other. The law stipulates that insurance companies must mutually contribute to the payment of compensation in a reasonable way with respect to negligence and other matters causing the accident. If the accident is solely the result of a defect in or negligence of one vehicle without this becoming evident with respect to the other vehicle or vehicles, compensation shall in that case be paid only by the motor liability insurance of the former vehicle. To summarize, an injured party of a road traffic accident is entitled to apply for compensation for personal injury from their own vehicle motor liability insurance. They need not apply for compensation from the opposing party’s motor liability insurance, although this is recommended if liability is clear. The injured party will therefore always receive compensation for personal injury damages in a quick and centralized way from a single insurance company. The liability split does not slow down the compensation payment. It is up to the insurance companies of the vehicles party to the damage to ultimately clarify the division of responsibility among themselves.

Directive 2005/14/EC of the European Parliament and of the Council of 11 May 2005, amending Council Directives 72/166/EEC, 84/5/EEC, 88/357/EEC and 90/232/EEC and Directive 2000/26/EC of the European Parliament and of the Council relating to insurance against civil liability in respect of the use of motor vehicles.

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Full compensation The scope of cover in motor liability insurance is very extensive. In the compensation of a road accident, the Damages Act is complied with subject to certain qualifications presented in the Motor Liability Insurance Act, observing the principle of full compensation for road accidents. The only precondition for compensability is that the expenses in question have a causal connection with the injuries sustained in the accident. The injured party also has a duty to limit the damages via the use of favorably-priced services and alternatives. Standardized bodily injury compensation Compensation is highly standardized in the Finnish system. Each year, the Traffic Accident Board ratifies standards and guidelines in order to harmonize the claims settlement procedure. Insurance companies use these standards as the basis of their claims settlement procedure. Table 1 gives some examples of the compensation standards for temporary physical injuries.

Table 1 Compensation standards for temporary physical injuries as of January 1, 2007, as defined by the Finnish Traffic Accident Board. All figures are in euros.

Minor personal injuries (1) Slight bodily injuries (2)

1,000 – 3,100

Severe bodily injuries (4)

3,100 – 7,700

Very severe bodily injuries (5)

7,700 –17,400

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According to the 1991 Act, rehabilitation means a set of procedures that promote and support the rehabilitee’s return to work and their ability to work; prevent, remove and reduce the disadvantages having an impact on work capacity and functional ability; and maintain and improve the rehabilitee’s independent performance ability. A person who is entitled to compensation in accordance with the Motor Liability Insurance Act and whose work capacity, functional ability or earning capacity are impaired due to the road traffic accident, will receive compensation for rehabilitation. Rehabilitation is also compensated for if it is likely that the person’s work capacity, functional ability or earning capacity could be impaired to a significant extent at a later date.

200 – 1,000

Fairly severe bodily injuries (3)

Exceptionally severe bodily injuries (6)

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no compensation

Special features of rehabilitation Rehabilitation compensated for on the basis of motor liability insurance has been part of the protection provided by Finnish legislation since 1965 when the Act on Disability Care Services for Persons Receiving Road Traffic Accident Compensation entered into force. The Act was replaced in 1991 by the Act on Rehabilitation Compensated for on the Basis of the Motor Liability Insurance (March 27, 1991/626).

17,400 –

Rehabilitation is provided at a rehabilitation facility chosen by the insurance company and is compensated by payment bond, as far as these costs are not prescribed as medical treatment to be carried out by the health center according to the Public Health Act (66/1972) or by the hospital district according to the Act on Specialized Medical Care (1062/1989). The need for rehabilitation is determined by the insurance company based on recommendations of the Insurance Rehabilitation Association. Need assessment will consider the rehabilitee’s age, previous activities, education, living conditions, restrictions arising from the injury or illness, and employment or occupational possibilities after rehabilitation according to the general terms and conditions observed in the labor market.

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The rehabilitee receives compensation for reasonable rehabilitation expenses and for the loss of earnings during the rehabilitation period. In rehabilitation matters, the appeal procedure deviates from the rest of motor liability insurance in that the decision of the insurance company can be appealed against at the Insurance Court. Role of the Insurance Rehabilitation Association The current Insurance Rehabilitation Association was established in 1964. It is a joint service company between insurance institutions providing motor liability, accident and employee pension insurance, and administering rehabilitation as part of the insurance compensation granted in accordance with insurance and earnings-related pensions. The association helps insurance companies in the preparation, management and harmonization of rehabilitation matters. Insurance companies make rehabilitation decisions based on the association’s assessment and recommendations. The insurance companies and the Insurance Rehabilitation Association do not have their own rehabilitation facilities or educational establishments; services are acquired from generally available service providers. Together with the rehabilitee, the association draws up a rehabilitation program and supervises its practical implementation. The association acts in co-operation with healthcare units, employment agencies, educational establishments and rehabilitation facilities. In functional ability rehabilitation, a hospital or other institution responsible for the care of the rehabilitee is responsible for the rehabilitation during the acute period. The insurance system will then compensate for the rehabilitation expenses according to actual costs. For example, in-patient and out-patient rehabilitation, aids needed due to functional defects, work required for improvements at home and adjustment training, are all compensated for as part of rehabilitation.

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Full cost correlation: compensation for medical treatment expenses The most recent change to the Finnish motor liability insurance system took place in 2005. Previously, as a chief rule, motor liability and employer’s liability insurance only compensated for medical treatment provided in the public sector; private physician’s charges were compensated for only in exceptional cases. The government collected a so-called “plaster tax” from motor and employer’s liability insurance companies to cover costs resulting from the treatment of injuries caused by road accidents. In 2004, this tax totaled € 51.6 million. The new system, known as “full cost correlation”, was adopted for road accidents taking place after January 1, 2005. Insurance companies now pay the full cost to the service providers of necessary medical treatment for bodily injury resulting from road accidents. They are not entitled to decide on the type of treatment nor do they have an obligation to organize the treatment, but can influence costs by selecting the place of treatment once the doctor in charge has established a need for care. This applies to both public and private healthcare institutions, a significant change compared to the earlier system. Insurance companies may organize competitive bidding between health service providers. The objective is to act in mutual understanding with the patient. The patient must receive medical treatment in compliance with the treatment recommendations required by the injury or illness that was caused by the road accident. When choosing the place of treatment, the injured party’s overall health and, wherever possible, previous long treatment relationships, must be taken into account in addition to the injuries and illnesses to be compensated for.

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The injured party can refuse to use the designated place of treatment, but is then entitled only to the client charge according to the Act on Client Charges in Social and Health Care Services. In addition to medical treatment, the charge applies to medical examination and rehabilitation costs relating to functioning ability. A public sector, healthcare institution must notify the insurance company liable to pay compensation of the start of medical treatment within a specified time from the start date to acquire a payment bond from the insurer. The notification must include the personal details of the injured party, information about the road accident, type of injury or illness, insurance company, starting date of treatment, treatment, treatment plan and the cost of treatment, and other necessary information for providing a payment bond. After submitting the notification, the healthcare institution is entitled to payment for costs until the insurance company directs the patient to another place of treatment. The aim of the transfer to full cost correlation was to speed up the injured party’s access to treatment, recovery and return to work, and to prevent unnecessary costs due to delays in treatment. As of the end of 2006, the greatest individual claim payment based on full cost correlation was approximately € 432,000.

The assessment system The assessment system is a funding model for compulsory statutory insurances. Its purpose is to leave risk related to long-term earning forecasts and cost-of-living and medical cost inflation outside the balance sheet of the insurance company as a non-funded item2. All insurance companies with motor liability insurance operations in Finland must be members of the Finnish Motor Insurers’ Centre. The insurance companies contribute to the funding of increases, compensations and payments according to the Motor Liability Insurance Act each year with the assessment system fee determined by their premium income. Even before full cost correlation, the assessment system was a special feature of Finnish statutory insurance lines, created to manage the funding of certain compensations such as the index increments of pension benefit compensations, in accordance with the Motor Liability Insurance Act, the Workers’ Compensation Insurance Act and the Patient Insurance Act in a way separately prescribed by law for each line. After transferring to full cost correlation, medical treatment and rehabilitation costs due 10 years after the accident date under statutory accident insurance and motor liability insurance were included in the legislation concerning the assessment system.

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Martti Pesonen, Report of the working group of the assessment system 2005.

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Reinsurance Issues

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Large bodily injury claims can develop over decades and be affected by as yet unknown legal, medical and social loss drivers. Re/insurance pricing (and reserving) is therefore a significant challenge, particularly for excess of loss reinsurers who carry these claims on a relatively small premium basis, compared to insurers, and who bear the brunt of large bodily injury claims inflation. The three articles in this final chapter review how bodily injury trends impact reinsurance and discuss specific ways in which this impact can be managed.

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Reinsurance Pricing Issues and Products Find out about the problems that reinsurers face when pricing and reserving for bodily injury and specific contract features â&#x20AC;&#x201C; including annual aggregate limits, occurrence definitions and index, severe inflation and sunset clauses â&#x20AC;&#x201C; that have developed as a response to these challenges.

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Periodical Payment Orders in the U.K. Although the impact of these payment orders is still uncertain, the expectation is for higher claims and administration costs for insurers and reinsurers, as well as increased credit and investment risk. Limiting risk through effective commutation and index clauses will help to stabilize costs for all parties.

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Long-tail Reserving Challenges Reserve shortfalls have been one of the leading causes of insolvencies for re/insurance companies. French motor excess of loss experience is presented to explain how this can happen. To enhance the understanding of trend deteriorations and improve the quality and stability of the reserve analysis, frequent information transfer between reinsurance claims analysts, underwriters and ceding companies is essential.

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Reinsurance Pricing Issues and Products David Waddell, PartnerRe

Claims payments for seriously injured people may continue for 40 or more years, while the development of mortality rates, medical costs and inflation rates remains uncertain. These exposures, however, have to be priced as accurately as possible today using only the currently available information and the best possible estimates. This article by David Waddell, Senior Pricing Actuary at PartnerRe, delves into the many different issues that must be considered in order to avoid under-pricing or over-pricing of the cover. Find out about the problems that reinsurers face when pricing and reserving for bodily injury, as well as specific contract features – including annual aggregate limits, occurrence definitions and index, severe inflation and sunset clauses – that have developed as a response to these challenges.

Introduction to Pricing Issues Adequate pricing is especially important for reinsurers. To an extent, insurance companies can usually rely on the fact that the volatility within their retention is limited, whereas excess of loss reinsurers will suffer much more dramatic effects if they get it wrong. Their claims have to be carried on a much smaller premium basis, since excess of loss reinsurers receive only a small fraction of the original motor liability premiums. Since it is not possible to accurately predict developments so far into the future, the only way to deal with the situation is to use all currently available knowledge and to keep the estimates conservative in case things go wrong. Claims are therefore projected into the future using two main inflation factors: • normal claims cost inflation, which is often based on a wage index as the closest available approximation to the inflation in motor liability claims • a loading for super-imposed inflation, which is based on a number of other factors that lead motor liability claims to increase at a higher rate than wage inflation. Getting these factors right is not easy, but is extremely important since under-pricing or overpricing the cover must be avoided as far as possible. For this reason, it is important to consider the following issues.

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Annuities In some countries there is an increasing use of monthly annuities and/or structured settlements (periodic payments) rather than lump sum payments to deal with seriously injured claimants. This can be a better solution for the claimant, since it reduces the risk that he/she outlives the payment. However, it also increases the administrative burden and uncertainty for the insurer and reinsurer and leads to higher non-discounted reserves. The reserving for such long-tail payments is heavily dependent on the mortality rates and interest rates assumed by the insurer. These have a significant effect on the expected claims severity, the volatility and the tail of the reinsurance claims. Many such claims are discounted by the insurer and reserved at a reduced amount which takes into account expected interest earnings between the present time and the expected date of the last payment. In many countries, however, this is not possible for non-life classes of business. Even if discounting is allowed, excess of loss reinsurers will usually want to see such claims converted to lump sums within a few years so that they can close their books. Few will want to carry either the long-term administrative burden or the parameter risk of changing future interest rates, costs and mortality rates on their books for the full period of the claim.

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The preferred way to handle long-term bodily injury claims for most reinsurers is therefore to have the ceding company pass them on to a life insurance company, so that the discounted lump sum that the ceding company pays the life insurer becomes, in effect, the claim for reinsurance purposes. This relieves both insurer and reinsurer of most of the volatility risk and administrative work involved in paying such claims. The life insurer generally has a large number of such annuities and therefore has the portfolio balance and administrative systems necessary to handle them properly. In addition, seriously injured people may have a shorter life expectancy than the rest of the population and therefore an â&#x20AC;&#x153;impaired lifeâ&#x20AC;? mortality table can sometimes be used to reflect the expected shorter payment period.

There have also been moves in some countries to reduce the burden on taxpayers by changing the cost allocations between liability insurers and other benefit providers (e.g. medical insurance, disability insurance, unemployment or social insurance), which generally results in the liability insurers paying for a larger share of any losses resulting from accidents than previously.

However, life insurers are usually only willing to take on such risks if there are flat monthly payments, with no risk that these will change in future as a result of legal or medical changes. Since it is often not possible to entirely exclude the possibility that bodily injury claims from motor or other liability covers may be re-opened or changed in the future, life reinsurers in such countries are often reluctant to cover these risks.

Unlimited cover Many European countries require insurers to provide unlimited cover for bodily injury claims arising from motor accidents. Insurers generally deal with this potential for unlimited liability by passing the risk off to their excess of loss reinsurers. Reinsurers therefore end up carrying the exposure and thus need to consider how to price for the possibility of a claim that exceeds anything that has been observed so far. Removing the upper limit of cover leads to a much greater potential for volatility in results. The additional premium charged to cover this significant exposure is usually small. For reinsurers the only solutions to this problem are either to not write unlimited layers (which may restrict their ability to write other covers for the same cedant) or to buy retrocession cover. Otherwise they will need to develop loss scenarios for potential events and charge accordingly for the cover, as well as restrict their line size on unlimited layers and write a wide geographical spread of risk in order to balance out their accounts.

Legal changes Legal changes to motor liability cover systems, annuities or health benefits can result in increases in claims or other costs if they result in a larger burden being placed on insurers. Such changes are in some cases made on a retroactive basis and therefore will affect all outstanding claims rather than just the new ones. In addition, easier access to the court system due to changes in the legal fee system (such as contingent fees and flat amounts), settlement methods, court cost allocations and/or the potential use of class actions to encourage mass claims can lead to a significant increase in liability claims and their related costs.

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Medical progress The trend to longer life-spans means longer payout periods for insurers. It also makes claims more sensitive to changes in the mortality and disability tables used, especially to an increase in future medical costs, as new treatments are developed. These costs generally tend to increase at a much faster rate than the average rate of inflation.

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Indexing and revaluing of claims Most excess of loss reinsurance covers protecting liability portfolios are subject to index clauses which attempt to maintain the relative relationship between the limit and deductible of the reinsurance cover in spite of inflation. But which index is the appropriate one to use to track claims inflation? Generally, large bodily injury claims increase at a higher rate than the retail price or wage indexes, yet in many jurisdictions there is no specific index that tracks this. Therefore, reinsurers have to try to find the closest possible index to use for their index clauses in order to avoid being left with too much of the burden of high future inflation. In many cases, however, there will be no alternative to using the local wage index, since no other index is publicly available on a consistent basis. Social inflation There has been a trend in past years for some European nations to play “catch-up” with others who provide higher awards. This results in current awards being much higher than past awards for the same type of injury. In addition, there are increasing attempts to move the cost of dealing with disabled people from the public to the private market. These additional inflationary trends are often referred to by reinsurers as “super-imposed inflation”, since these additional influences come on top of any inflation that is measured by the available indexes. This additional element can be very pronounced and therefore pricing actuaries need to consider such trends when estimating the cost of future claims payments. When predicting expected claims costs for pricing purposes, therefore, they will usually work with a combined loss inflation index that reflects both normal inflation (usually linked to wages) and super-imposed inflation.

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New types of bodily injury claims Technological change and new diseases bring with them new causes of potential future liability claims. New substances or processes can sometimes result in health problems only after many years of latency. Examples of potential problem areas include electro-magnetic field effects, genetically modified organism risks, nanotechnology, CJD/ mad cow disease, avian flu and SARS. A similar problem occurs with occupational diseases and latent exposures, with more claims developing from the currently known ones such as asbestosis, silicosis and work-related cancer, and the possibility of new future diseases. Since such claims are extremely difficult to foresee, reinsurers generally try to either exclude potential causes of mass tort claims or provide cover only on a claims made basis in order to limit the reporting period. The effects of changing safety measures can, on the other hand, have a positive effect on motor claims frequency and severity (e.g. seat belts, speed limits, driving conditions, improved roads and safer cars can significantly reduce the number of severe bodily injury claims). Increased traffic congestion in urban areas can also result in a shift in accident experience, so that there are more small claims and fewer large ones due to slower driving speeds.

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Changing reserving methods For an insurer, it is usually more important that their overall loss reserves are adequate than that an individual claim reserve is totally accurate. Sometimes the easiest and fastest way to establish a reserve for injury claims is to use a disability table, based for example on the age, salary and disability degree of the injured party. While this may result in a good overall reserve estimate, the resulting reserves tend towards mid-estimates and therefore often remove the high and low reserves values that are required by excess of loss reinsurers to price for large claims. For pricing purposes, the individual claims estimates produced by experienced loss adjustors generally are more accurate, since they better take into account the individual circumstances of the claim and claimant. Other factors, such as changes in the philosophy, staff, tax changes and overall profitability of the company can affect the way in which the reserves are estimated. Some companies tend to over-reserve during profitable years and underreserve during less profitable ones. Reinsurers must therefore be aware if the insurer has changed its reserving method for any reason. Reinsurance products and design Reinsurance products can, to some extent, be designed to limit the potential for heavily adverse results by adapting the conditions used. Some measures that reinsurers may take for the two main reinsurance coverage types are as follows: Proportional reinsurance Proportional motor or casualty treaties generally take the form of quota share covers, where the reinsurer shares the risk on a â&#x20AC;&#x153;one-to-oneâ&#x20AC;? basis with the cedant. In this case, the reinsurer has to rely mainly on the calculations of the cedant without an opportunity to influence the original pricing nor the detailed claims data required to do the necessary calculations on a risk-by-risk basis.

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Even on quota share covers, however, the reinsurer can take some steps to influence claims handling and his own exposure in certain cases of serious loss events. This can be done by applying restrictions or exclusions to the reinsurance treaty and by introducing contract conditions that give him some ability to influence matters. The following are some of the possibilities: Claims co-operation clause This clause allows the reinsurer to be involved in the settlement of pre-defined types of large or difficult claims. This can be especially helpful if the cedant does not have much experience dealing with serious injury claims, since the reinsurer may be able to provide expertise that results in the claim being settled more quickly or for a lower amount. Commutation clause Serious injury claims that involve annuities or periodic payments may continue for many years. In addition to the uncertainty surrounding the original payments (e.g. life span, inflation and interest rates), both the cedant and the reinsurer are likely to incur significant additional costs for the administrative burden of carrying on small reinsurance payments for many years. The cedant also has to consider the risk that the reinsurer may not be around in 20 years (or even in 10 years). It is therefore often best for both parties to commute such claims on a discounted basis after a few years in order to avoid this additional administrative workload. In some cases a clause is inserted into the reinsurance contract that states when and how such claims are to be commuted.

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Exclusions Some types of risk or activities are more likely than others to generate serious losses involving a number of insured parties. For example, buses and trains carry more people than private automobiles and are therefore quite likely to result in multiple injury claims in the event of an accident. Activities such as sports car racing, transporting dangerous or explosive goods or long-haul trucking are also more dangerous than driving a private car. Vehicles used for re-fuelling or baggage transportation on airfields (airside liability) could potentially cause extremely serious accidents if they collide with a plane full of passengers. Reinsurers will therefore often try to exclude such risks from the reinsurance cover or at least limit them to some extent, especially where unlimited liability applies. In terms of coverage, insurers may be legally required to provide cover for risks such as terrorism, whereas reinsurers are free to exclude or sub-limit such risks if they choose to. Non-proportional reinsurance Non-proportional treaties generally are excess of loss covers, since stop loss covers are rare for casualty business. Here, the reinsurer takes the largest part of the volatility risk, since any deterioration in large claims or in claims patterns will fall mainly into the reinsurer’s portion of the claims burden. This is especially so in Europe, where bodily injury cover under motor liability policies is in many countries legally required to be on an “unlimited” basis. Even in countries where motor liability cover is still subject to limits, there can still be significant additional exposure from “green cards”, which provide motorists traveling outside of their own country with cover up to the required limits (often unlimited) in the country they are visiting.

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Limits are one part of the problem, but the long payout pattern and resulting inflation for serious claims also increases the uncertainty for reinsurers. In addition to conservative pricing, excess of loss reinsurers have the following methods to try to spread the volatility and inflationary risk out somewhat: Index clause If the cedant’s retention is fixed only as a monetary amount, most of the risk of inflationary increases to the claim will fall fully into the lap of the reinsurer. In order to at least partially achieve a fairer distribution of the inflation risk, excess of loss reinsurance contracts in Europe covering liability risks generally are subject to some sort of index clause. This pegs the value of both the cover and the deductible to an index, which is usually the local wage index. This will still leave the reinsurer with more inflationary risk than the cedant, since the wage index rarely increases enough to cover the effects of increased medical costs, longer life expectancies and social inflation (i.e. the trend to larger awards), which generally result in bodily injury claims increasing by much greater percentages than the wage index alone would indicate. Severe inflation clause A similar but lesser effect to an index clause is achieved with the Severe Inflation Clause. However, in this case the indexing applies only once inflation as measured by the index has exceeded a previously defined amount, e.g. 20%.

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Occurrence Definition Excess loss covers generally respond on a “per occurrence” basis, which can sometimes lead to disputes over the occurrence definition when there is more than one claimant. This can be the case for occupational disease claims, where numerous employees can be exposed to the same substances and/or working conditions (e.g. asbestos, chemicals, silicon dust, etc.) over a period of many years. In order to reduce discussions as to which claims (if any) can be accumulated to form an “occurrence”, reinsurers generally insist on the use of an event definition clause (e.g. the ACOD clauses, which specify that each individual claimant will be considered to be a separate occurrence). Change in law/acts in force clauses Reinsurers can be significantly disadvantaged if unexpected changes are made to motor liability laws after they have gone on risk. If such changes result in an unforeseen increase in benefits, their losses may be much higher than expected. Many excess of loss contracts therefore include a clause which allows the contract terms to be re-negotiated if legal changes affect benefits after a contract has incepted. If the cedant and reinsurer cannot agree on new terms that are acceptable to both, the existing terms remain in force. Any claims arising under the cover are then treated in the same way that they would have been under the previous system. Annual aggregate limits In the past, reinsurers often provided unlimited free reinstatements on liability excess of loss covers. This resulted in reinsurers being hit with heavy loss burdens from an accumulation of late-reported asbestos or pollution claims. In order to avoid this problem in the future, many excess of loss reinsurance covers are now subject to an annual cap on all aggregated payments.

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Commutation clause As noted for proportional business, this clause is desirable for both parties in order to keep the tail of the loss payments to a reasonable length. The administrative workload to deal with long-term claims is however even somewhat greater for excess of loss covers, due to the need to constantly re-calculate the effect of the index clause and the re-allocation of the claim. Claims-made covers In earlier years, general and products liability policies were usually written on a “loss occurring” basis. This is a good method in cases where a loss occurrence is immediately evident. In the case of substances or products that do not show an immediate effect on health, however, such as exposure to asbestos, pollution or industrial chemicals, the point at which the loss had actually “occurred” was not always clear at the time when the problems became evident. This was especially so when the exposure to the problematic substance occurred over an extended number of years. After massive problems in the U.S. with asbestos and pollution claims, many insurers and reinsurers therefore decided to move from “occurrence based” policies to “claims made” policies. For these policies, it was therefore no longer relevant when the claim had originally occurred. The insurer who had issued the policy during the period when the claim was submitted took over responsibility. Reinsurers may also provide reinsurance cover only on a “claims made” basis, regardless of the coverage provided under the original policies, if they are worried about claims arising from earlier years.

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Sunset clause Another option open to reinsurers is to limit the period for claims reporting. This can be done by way of a “sunset” clause, which states for example that claims reported more than 10 years after the period of coverage will no longer be accepted under the reinsurance cover for that year. The reinsurer then knows at the end of the 10 years that they are definitely no longer at risk for further claims. Sunrise clause Related to the “sunset” clause, this is a clause in which reinsurers providing cover on a “claims made” basis agree to indemnify only claims made in respect of events which occurred during a limited period of years prior to the attachment of the “claims made” cover; e.g. five or 10 years. Claims that arise from events that happened earlier than this would thus be excluded. Conclusion In spite of these limitation measures, reinsurers will still normally be paying off bodily injury claims for many years. They can also be subject to a form of systemic risk. For example, a problem with loss development patterns affecting the whole market will probably affect all the business that the reinsurer writes in that market. The main way to deal with this issue and to avoid paying the price for wrong assumptions for a long time to come, is via risk diversification: achieve a spread of risks and do not concentrate too much risk in any one program or territory.

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Periodical Payment Orders in the U.K. Robert Boghos and Sylvain Jarrier, PartnerRe

Robert Boghos, Senior P & C Underwriter at PartnerRe and Sylvain Jarrier, Senior P & C Pricing Actuary at PartnerRe, discuss how periodical payment orders for bodily injury are changing the risk and loss profile of U.K. motor re/insurance. They explain the legislation and associated risks and present an example to show the potential monetary impact. Although the impact of these payment orders is still uncertain, the expectation is for higher claims and administration costs for insurers and reinsurers, as well as increased credit and investment risk. Limiting risk through effective commutation and index clauses will help to stabilize the costs for all parties.

Overview Recent legislation in the U.K. is intended to reduce National Health System (NHS) costs and produce certain societal benefits. It also raises considerable uncertainty and the cost of insurance and reinsurance. While many consequences on insurance costs are inevitable and will lead to increased prices, the insurance and reinsurance industries can reduce some of the costs and risks through effective commutation and index clauses. The U.K. Courts Act 2003 Following the U.K. Courts Act 2003, from April 1, 2005, U.K. Courts have the option to award a periodical payment order (PPO) in respect of damages for future pecuniary loss in bodily injury cases, without the agreement of the plaintiff or defendant. Any open claims prior to April 1, 2005 may also be settled in this way. Only special damages (i.e. financial loss excluding legal costs), which account for approximately 70% of an average bodily injury claim, can be compensated in PPO form. General damages will continue to be paid in a lump sum format. The Act’s aim is to reduce the cost burden to the NHS by preventing plaintiffs from spending, rather than investing, their lump sum payments and subsequently seeking healthcare support from the NHS.

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If a PPO is awarded, the claimant receives an annuity in the form of an annual or monthly payment from the insurer until his or her death. Previously, large bodily injury damage awards in the U.K. were compensated by a lump sum payment based on the Ogden tables (although structured compensation could be settled out of court). The amount of a lump sum payment is effectively calculated by multiplying annual compensation and care costs by an Ogden table multiplier. This multiplier is based on average life expectancy and takes into account expected future inflation and investment earnings. A second societal advantage of periodic payments is that they more closely match compensation to individual injured victim’s ultimate needs. Ultimately some victims will not survive as long as expected while others will live considerably longer. With a lump sum payment based on average life expectancy, the former will have effectively been paid for additional years of care costs and lost income while the latter will effectively “outlive” their compensation. Under periodic payments, the risk of “outliving” one’s compensation is eliminated. Theoretically, all bodily injury claims settled in court can have a PPO award as the judge is entitled to make such an award against the wishes of either party, although of course he will consult both parties in making his decision. However in practice, many observers expect courts to order PPOs only in respect of “minors” (those under 16 years of age) and “patients” (those considered incapable of making decisions as to their own wellbeing).

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Consequences for insurers and reinsurers A change from lump sum payments to periodic payments will generate fairly significant claims handling and financial impacts for insurers and reinsurers. The potential for increased economic cost for insurers is considerable and will be highly influenced by several currently uncertain factors: • Frequency of periodic payments: will judges restrict periodic payment orders only to serious cases involving minors or incapacitated victims, or will they increasingly apply them to a broad range of cases? • Longevity risk: increased liability due to mortality improvements beyond expected levels; this significant risk has impaired the development of an effective Impaired Life Annuity market for serious bodily injury cases. • Index risk: the use of the Retail Price Index (RPI) to adjust monthly payments for inflation is currently under serious legal challenge in court on the grounds that the RPI does not keep up with lost income and health care costs (Flora vs. Wakon 2006, Thompstone vs. Tameside & Glossop Acute Services NHS 2006 and John Corbett vs. South Yorkshire Strategic Health Authority 2006). The ruling in the Thompson case to use the faster increasing ASHE 6115 wages figure (rather than the RPI) for future care costs in periodical payments was upheld by the Court of Appeal (January 17, 2008). In fact, due to these arguments, one insurer recently settled a claim with a lump sum calculated using a faster increasing Wages Index. • Inflation risk: of course the actual level of future inflation and not only the choice of index becomes a much more important risk.

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• Investment risk, also known as asset/liability mismatch risk: the inability to purchase investments that will mirror the expected periodic payment stream in respect of duration and inflation. • Credit risk: as the run-off duration increases dramatically, reinsurers’ financial strength and risk management become an increasingly important concern for insurers. • Other changes are almost certain to occur. • Higher administration costs: with lump sum payments, claims are typically settled reasonably soon after a victim’s condition stabilizes (and/or when a minor comes of age). In a bit of an oversimplification, the insurer pays the lump sum to the victim (through a single payment or an agreed series of installments), reinsurers pay their shares to the insurer, and the claim is closed. With periodic payments, this relatively simple process becomes considerably more complicated. The insurer must now make provision for and manage investments for the victim’s life-long compensation, calculate and process years of monthly payments which increase with inflation, monitor the victim, and process continually updated claim information with various reinsurers (through their broker or direct). Administration costs will dramatically increase for insurers, brokers and reinsurers. • Shifting losses among layers: the combination of two influences will cause ground-up claims to reach considerably higher layers: – Periodic payments increase with inflation over many decades, whereas lump sum payments are discounted for the time value of money. – Increased variance in individual claims costs: some victims live less than expected and others will live considerably longer. This shift will generate increased losses in excess of loss reinsurance layers. The economic effect of this shift is partially mitigated by reinsurance indexation clauses.

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Lump Sum PPO XS Point XS Point indexed lump sum XS Point indexed PPO

Individual case simulation We consider the case of a 25 year old man who is entitled, five years after the occurrence date (year 1) of a car accident, to receive an annual payment of UK£ 130,000 (indexed using the RPI) plus a UK£ 1,000,000 lump sum. Based on the Ogden tables, the equivalent lump sum settlement would be UK£ 4,700,000.

A modeled example The following study highlights in a simplified way some of the issues which have arisen from the U.K. Courts Act 2003. We first examine an individual bodily injury case and compare the claim’s incurred value for a lump sum only and PPO basis. We then look at the potential impact of this and other simulated PPO claims on a market treaty portfolio. For simplicity, the RPI index is used for all indexation 1.

What would be the loss from this one claim to the reinsurance layer “unlimited in excess of UK£ 2,000,000” fully indexed?

14 12 10 8 6 4 2 0 1

The use of ASHE 6115 (rather than the RPI) for future care costs in periodical payments was upheld by the Court of Appeal in the case of Thompstone vs. Tameside & Glossop Acute Services NHS Trust, judgment dated January 17, 2008.

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Results • The loss to the layer for the equivalent lump sum is straightforward. Taking into account the stabilization (indexation 2) clause, the layer pays UK£ 2,270,000 paid at year 5. • The loss to the layer for the PPO is more difficult to calculate as it depends on how long the claimant lives. See figure 1.

Claim incurred (million)

Figure 1 Cumulative loss burden of the studied claim for a lump sum and PPO compensation basis, displayed as a function of the claimant’s longevity. Source: PartnerRe.

• Longer run-off duration, improved cash flow and investment income: one somewhat compensating factor is the fact that insurers will hold cash for much longer periods as claims are paid gradually over a victim’s lifetime as opposed to large lump sums paid at earlier stages. However, this benefit is limited as lump sums are discounted for the time value of money.

A mechanism that allows reinsurance layers to move with economic inflation.

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Figure 1 shows that in the case of a PPO, the reinsurer has a long-tail exposure for the claim matching the claimantâ&#x20AC;&#x2122;s longevity. The run-off duration of a periodical payment claim will far exceed a contract supporting lump sum only (in our example the lump sum claim was closed within five years). Treaty portfolio modeling In order to estimate the impact of PPOs on a motor market treaty portfolio, one must stochastically model a whole claims portfolio consisting of many individual examples like that above. The modeling of the claims portfolio is based on probability distributions of insureds, accident frequencies, and injury severities and expectations for several of the aforementioned uncertainties (PPO frequency, PPO index, inflation levels, investment returns, cash flow improvements, etc.) The results of our treaty portfolio modeling suggest that loss ratios will significantly increase under almost all scenarios, but that the discounted loss ratio may not increase to the same degree due to the combined influence of the indexation clause and improved investment income. The degree of increase could be significantly higher depending heavily on PPO frequency and inflation index assumptions.

A Partial Solution? One solution for limiting administration costs and credit risks for insurers is to include a commutation clause per claimant in the reinsurance contract. The modeled effect of such a clause on the run-off duration is shown in figure 2. Commutation is an effective risk management tool for reinsurers, limiting the reinsurance contract duration to more or less the same period as for lump sum claims. As the risks introduced by PPOs are reduced, pricing will not be as severely impacted. The clause would obviously significantly reduce the years of reasonably complex administration between insurers, brokers, and reinsurers. Conclusion This is a complex topic for which there is still considerable uncertainty as to market impact and development. However, the indications now are that PPOs will lead to higher claims and administration costs for insurers and reinsurers, as well as increased credit and investment risk. These increased costs and risks will inevitably lead to higher insurance and reinsurance premiums. Insurers, brokers, and reinsurers will all benefit by working together to limit the risks and maximize the efficiency of the entire process. Policyholders will then ultimately benefit.

Considering the increased administrative costs, shifting layers, and various risks, the impact on the overall economic cost of excess of loss reinsurance is likely to be substantial.

Figure 2 Simulation results showing the effect of index, PPOs and commutation on the average duration of a reinsurance treaty portfolio. Source: PartnerRe.

duration (in years)

10 8 6 4

Without commutation With commutation

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2 Lump sum only

PPO indexed by RPI

PPO indexed by PPO indexed by Wages index Medical index

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Long-tail Reserving Challenges Jean-Pierre Kervella and Thomas Schneider, PartnerRe

Estimating and managing long-tail reserves – an essential process especially when one considers that reserve shortfalls have been one of the leading causes of re/insurance companies’ insolvencies – presents actuaries in all markets with significant challenges. To characterize some of the inherent difficulties PartnerRe’s Thomas Schneider, Head of Global Reserving, and Jean-Pierre Kervella, Head of Paris Claims, present sample motor excess of loss data and consider the loss development trends, drivers and collective “takeaways” for insurers and reinsurers. To enhance the understanding of trend deteriorations and improve the quality and stability of the reserve analysis, frequent information transfer between reinsurance claims analysts, underwriters and ceding companies is essential.

Example: French motor reported loss development The long-tail nature of French motor excess of loss reported claims is apparent from figure 1, as is the fact that the development on cedant’s reported losses for this segment was worse for the recent calendar years compared to the longer-term average; i.e. there was an increasing trend of upward revisions in the reserves of the ceding companies. This latter point indirectly implies (and has been substantiated by) unexpectedly high claims inflation and/or that other destabilizing soft factors were at play.

80 % 60 % 40 % 20 % 0% 2

Maturity (years) last 7 excluding 2006 last 5 excluding 2006 last 3 excluding 2006

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The answers to these questions are vital in the estimation of the reserve levels for French motor business.

100 % Percentage of ultimate

Figure 1 Historical loss development on losses reported by ceding companies to PartnerRe for French motor excess of loss business, as of the year end 2006. The percentage numbers on the vertical axis represent the fraction of the ultimate claims value reported at a given point of time. The horizontal axis shows the age of development in years. The loss development is calculated as a series of link ratios between the cedant’s reported losses, using a weighted average over the last three, five and seven accounting years. All calculations are performed excluding the most recent year diagonal, in this case 2006, as this diagonal remains incomplete. Source: PartnerRe.

Two questions arise: 1. What were the drivers of the deterioration in the loss development observable over the last couple of observation years? 2. Is the noticeable aggravation in the development for the more recent years a trend that will continue in the future, or is it a temporary phenomenon and will the future development return to the all-year-average level?

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Why the deterioration? Three main drivers have been identified as contributing to the observed deterioration of the loss development for French motor excess of loss business. These are unexpectedly high claims inflation due to hyperinflation for specific costs, increasing life expectancy, and the destabilizing influence of discount rates.

• extreme increase in care cost inflation • substantial increase in medical cost inflation • various forms of social and judicial inflation; in particular, court rulings and changes in law mean that granted awards to victims are now higher compared to similar cases in the past.

An uncontrolled cost deviation Motor excess of loss reserves are set primarily for severely injured accident victims in order to indemnify the associated care costs, medical costs and income replacement, to name but a few claim cost components. The reserves are set up on notification of a claim and are then to a large extent paid out over the entire lifetime of the victim. The inflationary trends in bodily injury claim components in France were excessive over the last couple of observation years and claim costs have sky-rocketed, even for accidents having occurred in the far past.

Reinsurance wordings were not designed for such developments and thus failed to produce a corresponding balanced distribution of the bodily injury claim inflation between cedant and reinsurer. For example, the indices retained for updating the priorities and limits of impacted treaties did not neutralize the true level of bodily injury claims

The most notable inflationary increases have been recorded in the following positions (figure 2):

Figure 2 Average progression per year of specific bodily injury claim cost component parameters over the period 1996 –2006. Source: FFSA/AGIRA 2006, Benfield.

Reinsurers have been significantly impacted by these developments. A 2006 report of the “Comité Consultatif du Secteur Financier” (Ministry of Economy/Banque de France) mentions that losses from French motor business ceded to the reinsurance market increased by 44%, from € 1.6 billion in 2004 to € 2.3 billion in 2005. This change primarily reflects how the cost deviation led to a higher claims frequency and severity for reinsurers. Reinsurers became involved in claims that were not expected to trigger non-proportional layers, claims pertaining to past underwriting years that became more costly than expected at the time of underwriting.

10%

12%

14%

16%

Average Permanent disability Private damages Hospital/medical fees Provisional disability for work Third-party care/assistance Other social/judical

Victim disability rate > 50% Victim disability rate > 80%

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inflation. The most commonly utilized index, the GIM (Index of Salaries in the Metallurgic Industry), has increased by a yearly average of 3% over the last 10 years. The French Federation of Insurance Companies (FFSA) recognizes that bodily injury claim costs as a whole have increased by an average of 5% to 6% per year over the same period, the trend being largely worse for claims concerning young victims with a high permanent disability rate. Life expectancy continues to increase Most of the claim components under motor excess of loss contracts are linked to the life expectancy of the victim. Increasing life expectancy therefore has a direct impact on re/insurance cost. In the French market, insurance companies have replaced the mortality table TD 60/64 with the more recent mortality table TD 88/90. The latter confirms longer life expectancies and as such implies higher insurance and reinsurance cost. Even so, table TD 88/90 is based on a study from 1988 to 1990, and the life expectancies given there are now outdated. French life insurers are currently implementing newer mortality tables, TGF05 and TGH05, published by the Institut National de la Statistique et des Etudes Economiques (INSEE) in August 2006. If applied in the non-life insurance sector, this would further add to claims inflation and lead to a review of reserves, while improving the reserving accuracy.

TME% 60% of TME (3.5% maximum)

Following a long period during which 60% of the TME had remained above the maximum authorized 3.5% discount rate (steadily applied by insurers), further interest rate deductions created a situation where as from 1997, 60% of the TME fell below the 3.5% regulatory maximum rate (figure 3). Consequently, insurers were forced to review their gross reserves every year with a further reduced discount rate, a policy which also seriously impacted the technical accounts of reinsurers, particularly when reserving on an undiscounted basis. The TME reached its lowest point (3.43%) in recent history during the second half of 2005.

12% 10% 8% 6% 4% 2% 0% 1983

1985 1987 1989 1991

1993 1995 1997 1999 2001 2003 2005 2007 End of calendar year

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The discount rate applied by French ceding companies is 60% of the average rate of government bonds, the “Taux Moyen des Emprunts d’Etat” (TME) with a maximum of 3.5%, in line with the rule stipulated by the Insurance Code.

14%

Rate of interest (%)

Figure 3 Evolution of the average rate of government bonds (TME). As from 1997, 60% of the TME fell below the 3.5% regulatory maximum rate. Consequently, insurers were forced to review their gross reserves every year with a further reduced discount rate. Source: Benfield.

The influence of interest rates A change in the discount rate applied by ceding companies to a book of business impacts every single claim reserve (though the effects of such movements are more accentuated for larger losses). This is a significant driver of the observed loss development deterioration.

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The second question asks if trends will continue to deteriorate, or if it can be anticipated that the loss development will return to long-term average levels. Certain external events have been identified as “one-off” factors that have incidentally disturbed the actuarial models. Examples include the move from the French franc to the euro in 2001 (effect of the rounding of the parameters for calculating the reserve for future care costs and permanent disability compensation), and the move to a 35 hour working week in 2002 which had a huge effect (more care assistants are consequently needed for heavily impaired victims). Excluding other such potential events, the expectation for future development is as follows: • Inflationary trends for care cost, medical cost and related positions will continue to outweigh general inflation, but have already begun to decrease. Both the insurance industry and public bodies are seeking solutions and will hopefully find ways to further limit and contain the current drivers of French bodily injury claim cost inflation. Questions and concerns are being raised by the recent decision to implement the new “DINTHILAC nomenclature”, which further details the parameters and components of compensation for the physiological and pecuniary loss of an injured victim: this will probably imply elements of inflation, which so far remain to be evaluated.

• Discount rates will continue to change and to affect the reserve levels of ceding companies. The current expectation is that interest rates will continue to rise in the short to medium term, translating into further decreases in discounted reserves. This will at least partly offset the cost inflation from the above mentioned loss drivers. As the above points suggest, the loss development for this business segment has indeed shown notable improvement during 2007. Looking forward, the overall expectation is that although loss inflation will continue its upward trend, the impact on reserve levels in the medium term will be reduced by further discount rate reductions. With recognition of the loss inflation and incremental reserve adjustments to take the latest cost and mortality data into consideration, the future loss development on reported losses in France is likely to stabilize, slowly returning to the all-year-average level.

• Life expectancy will further increase. The use of more up to date mortality tables will contribute to further loss inflation and reserve instability, but is essential to increase the adequacy of reserves.

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A combined approach As the adequacy of reserves is essential to all re/ insurance companies, it is clearly paramount that the driving forces behind loss development are understood and that their implications are integrated as quickly as possible not only into pricing and contract formation (including improved indexation terms in excess of loss reinsurance contracts), but also within the reserving model.

Frequent communication and information transfer between reinsurance claims analysts, underwriters and ceding companies can substantially enhance the understanding of trend deteriorations â&#x20AC;&#x201C; materially improving the quality and stability of the reserve analysis.

Probably the biggest single challenge for reinsurance reserving actuaries in all markets and business segments is that although they may be aware of the loss and reserving issues, i.e. that inflationary trends have been high, life expectation is increasing and discount rates are changing, it is in fact often unclear as to the extent and point in time when a ceding company has build or will incorporate these changes into their internal reserving models. Furthermore, even if the extent and time is known, a reinsurer usually aggregates data across cedants in order to construct homogeneous data segments. As a result, the impact of changes in reserving assumptions in a reinsurance loss reserving triangle is spread over a band of diagonals and individual effects are blurred (figure 4).

Development year 1

Underwriting year

Figure 4 Reinsurers aggregate data across cedants to construct homogenous data segments for reserving, blurring the effect of individual changes in a cedantâ&#x20AC;&#x2122;s reserve assumptions. Source: PartnerRe.

1987 & prior 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

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Impact of changes in assumption is blurred

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