Insurers and policyholders involved in motor and liability claims are facing costs well ahead of general inflation, combined with lower investment returns. And two recent court decisions will add inflationary fuel to the fire.
In July, the Supreme Court ruled in Crilly v Farrington that hospitals may charge the full cost of treating road traffic accident victims who successfully pursue personal injury claims against the insurers of at-fault drivers.
This is a form of double taxation for motorists, as health care costs are already funded from general taxation. The consequences of this ruling will mean an increase in the claims costs burden of motor insurance companies, which is ultimately funded by their policyholders.
Also, a High Court ruling by Justice O'Sullivan in McEneaney v Monaghan District Council, on lowering the interest rate assumptions used in calculating compensation awards for future loss (from 4% to 2% for medical and related care, and from 4% to 2.5% for other costs), illustrates the double whammy effect of a low interest rate environment on insurers.
Not only are insurers earning less investment income (which is used to offset underwriting losses on motor and liability insurance) but as a result of the ruling, compensation payouts will now rise in all cases involving future loss.
This element of compensation could increase by more than 20% in the case of a seriously injured 30-year old expected to need medical care for life. In the case of compensation for costs that do not arise immediately, the effect is even greater. The extra cost will ultimately have to be met by the public.
The table shows a typical breakdown of premium and investment income against claims and other costs in motor insurance. Clearly, premiums can only come down if costs reduce - and claims costs are by far the biggest element of cost paid out of the premium earned - or if investment income increases, which is unlikely in the current climate.
As long as the rise in personal injury claims continues to be above inflation, the chances of making meaningful savings in the claims costs bill are extremely remote - and court decisions such as those we have seen recently will only further exacerbate the problem.