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Personal lines motor insurers will be forced to pay larger compensation payments to bodily injury claimants over longer periods of time due to the growing popularity of a 2003 legal ruling.
The use of regular larger compensation payments to claimants, under the Periodic Payment Orders, are becoming more common, according to the Institute and Faculty of Actuaries and in 40 years time, 35% of insurers’ liabilities would relate to such payments.
Insurers are particularly at risk of being tied into PPOs by males aged 17-25 who have long life expectancies and are commonly involved in “catastrophic bodily injury claims”.
Before 2003, defendant insurers paid claimants one large lump sum which placed the onus of investing the money, so it lasts their life time, on the claimant.
Under the 2003 legal ruling, insurers were ordered to give claimants regular payments.
Karl Murphy, of The Actuarial Profession’s third party working group said take up was initially slow, with one or two per quarter but became more popular after the global financial crisis in 2008, investment returns fell and claimants “were worried if they could make a proper investment return on a large lump sum and were probably less keen to take the risk investing their money.”
In the same year, another legal ruling dictated that compensation payments be linked to the healthcare workers’ earning index, which increased the value of the monthly payment compared to the lump sum equivalent.
Murphy said the risk moved from the claimant, who decided how to invest their compensation money to ensure it lasts their lifetime, to the insurer and reinsurer.
“The length of these liabilities can be very long. A lot of these awards are given to young people – a large proportion to those people in their late teens and early 20s who have long life expectancies.
“Suddenly insurers have liabilities that on average would have run to 41 years but could run considerably longer. It is difficult to tell the life expectancy of someone who has been left severely disabled by an accident.”
Medico Legal News Source: Claims Standards Council
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