Reinsurance Tutorials #8 - Season 2
Hi everybody 👋
You may ask yourself why we would do a focus on the French market and that would be a perfectly legitimate question!
As you might have seen in the previous videos, CCR Re has a long experience in this line and Sylvie, in particular, has enabled the company to keep improving its knowledge in this area.
Therefore, if you wish to go further, I strongly encourage you to download the white paper published by her team of experts from our website. The graphics in this video are based essentially on this study that is a good representation of the market in our country.
Let’s start! ⏬
Third-party motor liability
As Patrick already mentioned, motor insurance can refer to damage or liability. And these risks are quite different from one another. In this video, we will focus on third-party motor liability, that is to say, the long-term part of motor business where the amounts at stake for a single claim can be very high.
In this respect, if motor liability covering property damage does not have a high claims frequency, the claims that do arise are nevertheless among the costliest.
One of the most infamous claims remains the Mont Blanc tunnel fire from 1999. Indeed, motor liability insurance was called into play as a truck caught fire in the tunnel, causing several deaths and injuries. But the fire also caused significant property damage and business interruption losses of over a hundred million euros to the insurance market!
Let’s now talk about motor liability covering bodily injuries where claims are much more frequent and can also reach high amounts.
The French law of 1985, also known as the Badinter Act, provided the right to compensation for victims of traffic accidents involving land motor vehicles and we can easily see how much this impact insurers!
This line of business is characterized by high volatility and, thus, the presence of large claims. Each year, 150,000 victims generate compensation of nearly 5 billion euros and this amount is growing by 7% annually. What we have noticed in particular is that only 0.5% of the victims receive 1 billion euros, that is to say 22% of the total amount of compensation!
Moreover, for these victims:
- 70% of the severely injured victims are men, who for different reasons have a very risky driving habits (and I am totally impartial when saying this of course!), and are over-represented in motorcycle and alcohol-related accidents,
- 42 % of the victims are passengers and 22% are pedestrians
- And, as sad as it sounds, two thirds of the severely injured victims are under the age of 30. Indeed, younger victims are over-represented in large claims insofar as they have a higher life expectancy and, as a consequence, financial compensation is expected to be much higher of course.
Regarding such claims, there are many categories of damage that can lead to compensation nowadays, the most important of which is third-party assistance, and for good reason, as it comprises nearly half of all compensation. The aim of third-party assistance is to facilitate the day-to-day life of the victim and offset the loss of autonomy.
According to our observations, 80% of victims suffer from major cranial trauma or spinal cord injury, so that we understand why this category of damages is so important. Besides, the hourly cost of personal assistance continues to grow and the current rate has now reached 20 € an hour.
We must also mention future loss of earnings that compensate the decrease of income (especially in cases where the victim is an executive) and future medical expenses both of which are major prejudices. Before you get too scared, don’t worry, I won’t list all the categories of damage! If you should want to delve deeper into this topic, there is the Dintilhac classification system that defines all of the categories, depending on whether:
- A person is a direct or indirect victim of the accident (the latter being the family suffering from the situation because of financial prejudices or loss of affection);
- The losses are economic or non-economic;
- The losses are temporary or permanent, and whether they occurred before or after the date of stabilization of the injuries. One main issue concerning these losses is the fact we are talking about human beings and the victim’s status can change over several years!
Which leads us to the fact that this line of business is considered long-tail for the reasons just mentioned. And, as a consequence, this means for insurers and reinsurers there are reserving issues to address.
As you already know, in insurance there is a reverse production cycle so that the insurer gets a premium from the insured but doesn’t know if a claim will have to be paid, and very often, the amount is not known in advance. This is why reserves are very important and are meant to enable the insurer to meet its commitments to its insured.
Moreover, when settling long-tail reserves, the insurer must take into consideration the expected inflation rate on the cost of the damages, but also the life expectancy of the victims.
As mentioned earlier, for the same accident, a 17-year-old and a 55-year-old victim are not statistically equivalent. In the first case, the insurer will expect to pay higher compensation. And, finally, the method of payment, annuities or lump sum compensation, is also very important when estimating the claim.
Annuities are often the preferred method of payment for third-party liability claims. The most important category of damage, as mentioned earlier, corresponds to a schedule of evolving payments.
From the moment the insurer is informed of the occurrence of a claim until the moment the annuity is established by a court decision or a financial settlement, reserves can be booked according to any classical method. However, immediately after, the insurer must use the table TD 88/90 at 60% of the TME rate increased by 10 points within a 3.5% limit and at an inflation rate of 2% for all road accidents occurring after January 1, 2013. As you can imagine, the timeline for settling this type of claim is very long and the case remains open in the accounts until the death of the annuitant.
For lump sum compensation, it can be easier for the insurer and reinsurer to handle and manage the claim. The objective is to convert the annuities into a capital amount and the cedent can use the table of its choice among the many available such as the BCRIV table or the Gazette du Palais table. Keep in mind that the impact on the total estimation of the claim can vary very (very!) significantly.
As far as motor liability in France is concerned, most insurers choose excess of loss unlimited cover for reinsurance. We can quite easily see how it works in case of a lump sum payment. The reinsurer will take over the amount above the priority of the treaty, once the amount is established. However, in the cases where annuities are at stake, the distribution of the losses between the insurer and the reinsurer is difficult to establish and must be defined in the treaty through an annuity purchase clause or a follow the fortunes clause (which were explained by Sylvie in the previous video).
The treaty may also clarify if annuity adjustments (no longer handled by the Mandatory Insurance Guarantee Fund for Road Accidents since January 1, 2013) remain the responsibility of the insurer or, on the other hand, if the risk is transferred to the reinsurer.
The French market is of course affected by hot topics such as autonomous vehicles, much like in other countries. But it must also face new specific challenges. For instance, the extension of the right to compensation for driver victims that might lead to a 50% increase of compensation paid to severe victims!
All these potential changes demonstrate that the economic balance of this line of business can be quickly put at risk and the insurers and reinsurers may need to adapt their old habits to our new environment!
Anyway, enough about the Frenchies, let’s now have a look at other territories with Laurent in the next video!
Bye for now 👋
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