Following the Thompstone v Tameside judgement, insurance and reinsurance of bodily injury risks has ...
Following the Thompstone v Tameside judgement, insurance and reinsurance of bodily injury risks has potentially become more expensive. If provision for the cost of care is indexed at rates in excess of increases in the Retail Prices Index, this will have a significant impact on the present value of periodical payment awards. Further, this effect will fall disproportionately on excess-of-loss reinsurers, and will be most significant at the higher layers in reinsurance programmes.
In Thompstone, the High Court considered that, in order to enable periodical payments to keep pace with the increasing costs of providing care, the RPI is not the most appropriate index. Indeed, having heard the opinion that RPI movements have lagged behind earnings growth in the past and that this trend is likely to continue, the court considered "indexation of the claimant's future care costs by reference to the RPI would inevitably lead to under-compensation".
For at least two key reasons, the consequences of case law are potentially far-reaching. First, the take-up of periodical payment settlements may increase; the logic of ensuring that an award moves in step with inflation, as measured by RPI or an alternative index, is compelling. Second, the compound effect of annually inflating a periodical payment by some factor in excess of the RPI soon becomes significant. The reinsurance industry does not dispute that injured claimants should receive their due recompense and care but - due to the 'gearing effect' - the burden of claims inflation arising from judgements such as Thompstone falls disproportionately on the reinsurance sector.
Given that periodical payments are most likely to be favoured in cases involving younger claimants - with the heavy burden of care costs this implies - the potential effect on the liability market in general, and on excess-of-loss reinsurers in particular, is material. This could lead to a significant impact on reinsurance rating models for businesses exposed to bodily injury claims.
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