Christopher Rowland reports on changes to the way liability claims will be paid in the UK
UK insurers and their reinsurers are gearing up for a dramatic change in the way liability claims are paid, due to the Courts Act 2003.
Historically, most personal injury claimants have been paid in one lump sum. But the implementation of a section of the Courts Act enables the court to order insurers to pay claimants periodic payments for life. The act reforms the court system in England and Wales and includes two sections on damages, which become effective on 1 April.
A principal rationale for the changes is that lump sum payments almost inevitably are calculated incorrectly. Either the claimant will exhaust the money if he lives longer than expected or the claimant's family will receive a financial windfall if the claimant dies early.
The changes ostensibly should not add significantly to insurer and reinsurer loss costs. However, the personal injury tail will move from the current seven to 10 years - the period it normally takes between a serious accident and a claim settlement - to as long as 50 or 60 years, depending on the life expectancy of the claimant. Further, reinsurers also must adapt to the Courts Act 2003, given that most UK accident/casualty reinsurance is written on an excess-of-loss basis with high deductibles.
Historically, if there was a very large loss, the reinsurers knew exactly where they stood and could close their books at the same time as their cedants. But with the changes to the law, an award of £5m could see reinsurers not even begin paying their portion of the loss until year 25 under typical reinsurance structures.
The UK property and casualty industry is still struggling to ascertain the affects of the Courts Act. Although insurers theoretically can fund the periodic payments themselves, life insurers use financial instruments for reserving long tail personal injury liabilities that are different to those used in the property and casualty industry.
While annuities can be purchased, there are few remaining annuities providers after the upheaval in the market over the past few years.
In mid-March, at the time of writing, the Department for Constitutional Affairs was developing guidance for the Courts Act.