Written evidence from the Institute and
Faculty of Actuaries (CMI 05)
ABOUT THE
ACTUARIAL PROFESSION
The Institute and Faculty of Actuaries is the chartered
professional body for actuaries in the United Kingdom. A rigorous
examination system is supported by a programme of continuous professional
development and a professional code of conduct supports high standards,
reflecting the significant role of the Profession in society.
Actuaries' training is founded on mathematical and
statistical techniques used in insurance, pension fund management
and investment and then builds the management skills associated
with the application of these techniques. The training includes
the derivation and application of "mortality tables"
used to assess probabilities of death or survival. It also includes
the financial mathematics of interest and risk associated with
different investment vehicles - from simple deposits through to
complex stock market derivatives.
Actuaries provide commercial, financial and prudential
advice on the management of a business' assets and liabilities,
especially where long term management and planning are critical
to the success of any business venture. A majority of actuaries
work for insurance companies or pension funds - either as their
direct employees or in firms which undertake work on a consultancy
basis - but they also advise individuals and offer comment on
social and public interest issues. Members of the Profession have
a statutory role in the supervision of pension funds and life
insurance companies as well as a statutory role to provide actuarial
opinions for managing agents at Lloyd's.
1. BACKGROUND
Motor insurance offers cover to both personal and
commercial customers in the UK and is compulsory in respect of
third party property damage and third party bodily injury. Insurers
collect of the order of £10 billion in premiums each year.
The Actuarial Profession commissioned a working party to investigate
third party motor insurance based on some worrying inflationary
trends being reported by individual insurers. The working party
reported its findings at the UK Actuarial Profession's annual
General Insurance conference (GIRO) in October 2010. These findings
were based on data it collected from 89% of the UK regulated motor
market. In addition the working party also carried out research
on international trends and the link between the legal framework
and claim inflation.
2. A LOSS-MAKING
BUSINESS
The motor insurance industry lost money in 2009 (as
per the FSA returns based on combined operating ratios) - a loss
of 21p for every £1 of premium for personal policies and
an equivalent loss of 8p for commercial policies. The indications
from the working party data are that the cost of bodily injury
claims (which comprise around 50% of the cost of claims) are increasing
at around 30% per annum. Insurance premiums are already rising
significantly as a consequence. All this increase in claims cost
is occurring, despite the number of accidents having decreased
over recent years. The Confused.Com/EMB press release on 12 October
cited market increases of 37.5% for comprehensive policies over
the last year (more for non comprehensive policies). Customers
shopping around will however pay increases substantially less
than this. It is highly likely that material further increases
will be required before the UK insurance market moves from a position
of running heavy sustained losses to one where it can be placed
on a sound and sustainable economic footing.
3. DRIVERS OF
RISING CLAIMS
COSTS
There are three elements in the inflating cost of
the motor insurance to which we would like to draw the Committee's
attention:
An ABI survey
reports annual increases in the cost of insurance fraud of 14%,
with a cost specifically to motor insurers of £410 million.
The increase
in claims management companies and their activity in generating
additional bodily injury claims and claimants in motor accidents.
Linked to
the above, the increasing proportion of claims which come with
legal costs attached to them (where legal costs are incurred they
typically make up about 40% of the total bodily injury claims
cost).
At least the last two of these elements of cost are
containable by appropriate legislation.
4. OTHER UK AND
INTERNATIONAL REGIMES
Scotland does not allow referral fees for lawyers.
Scotland also does not show the high levels of bodily injury inflation
seen in England. Other countries, depending on their legislation
either have or do not have a problem. For example in addition
to Scotland, France, Germany, Spain, China and Switzerland do
not appear to currently have a problem. Ireland has largely contained
the legal cost element. But on the other hand Hong Kong and Poland
very much have a growing problem, and countries such as the USA
have (depending on the state) a severe problem. Legislative approach
underpins many of these differences.
5. IMPACT OF
NEW AND
POTENTIAL MEASURES
New measures were introduced in the UK on 30 April
2010 (the Ministry of Justice Reforms) whereby claims can enter
a prescribed, time and cost limited process under certain conditions.
It is possible that these may contain some legal cost elements.
The current expectation of the working party however is that any
cost containment may be very partial. Currently consultation is
underway on the recommendation by Lord Justice Jackson (January
2010):
Banning referral
fees.
Abolishing
the recoverability of success fees and ATE premiums.
Increasing
general damages awards by 10%.
Introducing
"qualified one way costs shifting".
Introducing
fixed legal costs for fast track cases worth up to £25,000.
Promoting
Before the Event legal expense insurance.
We believe that the findings of the working party
provide important input to this consultation. In particular they
identify the scale of the financial problems that the Lord Justice
Jackson recommendations seek to address.
6. FURTHER INFORMATION
A summary report is attached in the form of a PowerPoint
presentation.[1]
In addition, members of the working party would be happy to meet
with the Transport Select Committee to discuss their findings
in more depth.
November 2010
1 Not printed. Back
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