Motor market’s overall COR reached 122% in 2009 as claims farmers multiplied

The biggest industry story of the past two years has been the staggering rise in personal injury claims. Nearly all insurers were taken by surprise at the scale of the increase and the speed at which it hit – seemingly from nowhere.

What fuelled the rise in personal injury claims?

Put simply: claims farmers are to blame. These businesses, also known as accident management companies, encourage anyone who has been in an accident to file a claim. Over the past two years, the number of these companies has exploded and they have used numerous techniques, even texting potential claimants, to further encourage the trend.

The number of registered firms more than doubled between 2008 and 2009 as the trend, originally an American phenomenon, crossed the Atlantic.

Another very telling statistic is that the rise in reported injuries from car accidents rose 13% between 2008 and 2009, while the number of accidents actually fell by 6%. That means that every time a car crashes, drivers and passengers are much more likely to file a claim.

How has it affected insurers?

This trend has affected insurers very badly. Many were caught napping by the sudden and dramatic explosion in personal injury claims. For example, RBSI posted a second-quarter operating loss of £293m in August 2010. That same summer, IAG UK reported profits down by 50% and a eye-watering £206m injection into its reserves. Ageas, then Fortis – another major motor insurer – saw profit before tax slump 68% to £8.4m in the first half of 2010.

The overall combined operating ratio of the motor market was 122% in 2009, meaning insurers were paying out £1.22 for every pound they received in premium.

Did anyone buck the trend?

A couple of players have – so far – escaped. Admiral is a notable example of a motor-only insurer that has not had to strengthen its reserves. Sabre has also managed to turn a profit, by staying small and focusing on niche business.

What are the claims for?

Three-quarters of personal injury claims in the UK are for whiplash, costing insurers £2bn a year. According to the ABI, nearly 1,200 whiplash claims are made every day – six times more than the number of people who claim for workplace-related injury every year.

Speaking at a recent conference, the ABI’s assistant director of motor and liability James Dalton said: “Despite the statistics, I doubt that the UK has some of the weakest necks in Europe. Often difficult to diagnose, easy to fake and exaggerate, whiplash is a fraudster’s dream.”

How is the industry tackling the trend?

So far, there has not been a joined-up response to the rise in personal injury claims. Different insurers are trialling different techniques, and one common response is to work harder to weed out fraud.

There is also a trend for rehabilitation of claimants, to try to get them back to full fitness as soon as possible and so reduce the amount for which they claim.

The ABI is calling for the implementation of government proposals for civil justice reform to ensure that genuine claimants get fair compensation and access to rehabilitation quickly, and fraudsters can be rooted out. It has also called for a campaign to raise consumer awareness on the need to keep a safe breaking distance from the vehicle in front – so-called ‘tailgating’ is the main cause of whiplash – and for authoritative medical guidance on how to accurately diagnose and treat genuine whiplash.

Sabre chief executive Keith Morris recently told Insurance Times that he supported the introduction of a standard test to determine whether whiplash claims were genuine.

“No reputable lawyer wants to take on a fraudulent claim, but they can’t tell whether they are fraudulent or not,” he said. “It’s pretty much down to the credibility of the claimant and the witnesses. If they appear credible, the judge will accept their story.”

Risk management association Airmic’s chief executive, John Hurrell, recently wrote in Insurance Times: “Our industry has been highly effective in making its case to legislators, but less so with the public. It needs to do more to get across the message that the role of insurance is to protect individuals (and companies) from the economic consequences of misfortune – not to act as an arm of the welfare state.

“Furthermore, the costs associated with that compensation should be directed to the claimants – and not lost in disproportionate legal expenses that drive up premiums and slow down the compensation process.”