We surveyed motor insurers on recent PPO settlement activity and how COVID-19 has affected large claims.
We recently ran our second annual UK motor PPO survey, giving market-wide insight on PPO settlement activity. This year we extended our survey to cover the impact of COVID-19 on other large bodily injury claims (using a threshold of £1m indexed to 2011*).
Participating firms write around £8bn annual gross written premiums, covering a large proportion of the UK motor market.
Key insights
- Over the 12 months to 30 September 2020, average PPO propensity was 17%, although median propensity was only 6%. This demonstrates the diversity of experience across different insurers.
- As expected, there has been a significant decrease in large claim frequencies in 2020 as a result of COVID-19. However, the survey results suggest there is a weaker link between traffic volumes and large claim frequency than for small claims.
- There is some evidence of an increase in the proportion of large claims involving a cyclist or pedestrian, although this has not been seen consistently across all insurers.
PPO and large claim settlement activity
The chart below shows the number of PPOs and large claims that have been settled since April 2017 (ie representing the period since the Ogden rate reduced from 2.5% to -0.75%).
There was an uptick in PPO settlement activity in the six months to September 2020. This contrasts with large claims settlement activity, which was lower than in the previous six months. It is not clear whether the increased PPO settlements are driven by COVID-19 or simply random variation.
Over the 12 months to 30 September 2020, average PPO propensity was 17%, although median propensity was only 6%. This demonstrates the diversity of experience across different insurers.
It is not yet clear to what extent COVID-19 has impacted PPO propensity. Against the backdrop of volatility in investment markets, we expect that claimants’ advisers will be steering them towards PPOs. However, as ever, “cash is king” and, in a -0.25% Ogden rate world, claimants will continue to find lump sums attractive.
Large claim frequency experience during 2020
Wider experience across the market has shown that damage and small bodily injury claims have decreased broadly in line with the reduction in car traffic volumes. However, the picture is less clear for large bodily injury claims.
We asked insurers how their reported large claim frequency experience during 2020 compared to that during 2019. The chart below shows the actual reported claim frequency for each of 2020 Q1, Q2 and Q3 as at 30 September 2020 as a proportion of the corresponding quarters in 2019 Q1, Q2 and Q3 as at 30 September 2019 (blue bars).
The grey bars show the ratio of car traffic volumes in 2020 vs 2019 in each quarter, for comparison (based on statistics published by the Department for Transport).
The survey results suggest there is a weaker link between traffic volumes and large claim frequency than for small claims. For example, COVID-19 only impacted the latter stages of 2020 Q1, but the decrease in claim frequency seen by survey participants was much greater than implied by the decrease in traffic volumes.
Large claims are volatile by nature and there are a number of other factors which drive experience in addition to overall traffic volumes. Other key drivers of changes in large bodily injury claims as a result of COVID-19 include:
Lower large claim frequency
- Fewer occupants per vehicle, due to social distancing rules
- Fewer cars involved in collisions, due to quieter roads
- Fewer journeys with children, due to home-schooling
- Fewer new drivers on the road due to suspended driving tests and young drivers more likely to be out of work or school
- Fewer older drivers on the road due to shielding rules
Higher large claim frequency
- Adverse medical outcomes for claimants due to strain on the NHS and/or complications driven by COVID-19
- Greater proportion of accidents involving cyclists and pedestrians, as more people avoid public transport
- Higher average speeds due to reduced traffic volumes
- Increased costs of care due to increased demand for healthcare as a result of COVID-19
One factor we were keen to explore as part of the survey was the increase in the number of cyclists and pedestrians on the roads.
The chart below shows the proportion of large claims involving a cyclist or pedestrian in the first three quarters of 2020 and how this compares to the corresponding quarters in 2019.
The proportion of large claims involving a cyclist or pedestrian in the first two quarters of the year were broadly similar to 2019, but 2020 Q3 saw a significant increase. For the first three quarters of 2020 combined, 50% of large claims involved a cyclist or pedestrian, compared to 39% for the first three quarters of 2019.
Accidents involving cyclists and pedestrians may be less of an issue for insurers during the winter months, but as the weather improves during the current lockdown, insurers should keep a close eye on such claims, given the increase in exposure to large bodily injury claims.
PPO assumptions
Finally, we asked insurers for their latest PPO assumptions and how these compared to 2019 year end.
There has been a slight increase in the average assumed PPO propensity compared to 2019, although a number of insurers have kept their assumed propensity unchanged.
ASHE assumptions are broadly the same as last year. However, the latest ASHE inflation has since been published and is higher than in recent years (ASHE inflation for 2020 was 5.3% at the 80th percentile). We would not necessarily expect long-term ASHE inflation assumptions to change in the face of short-term volatility, although insurers should be mindful of inflationary pressures on care costs in the context of COVID-19 and Brexit.
Net discount rate assumptions were also similar to last year. This is unsurprising given that long-dated real yields are broadly similar to those a year ago.
Conclusions
Despite potential court delays arising due to COVID-19, PPO settlement activity over the 12 months to 30 September 2020 was higher than in recent years, and a number of firms have increased their PPO propensity assumptions compared to 2019 year end. PPOs continue to represent a significant risk for motor insurers, particularly in the face of recent high cost of care inflation and low investment yields.
From wider market experience, COVID-19 has led to significant savings for UK motor insurers in the form of reduced traffic volumes, resulting in lower accident frequency. From the survey results, it’s clear that large claims frequency has also decreased significantly, although the extent of this decrease is less predictable and has varied significantly between insurers.
These recent distortions to claims development patterns make reserving recent accident periods more challenging and leads to greater uncertainty in the reserves the longer restrictions continue.
Firms should also keep a close eye on changes in the underlying profile of large claims, including an increase in the proportion of claims involving a cyclist of pedestrian.
*Note: For the purposes of the survey, a large claim is defined as a claim greater than £1m in 2011 settlement year (or accident year, where relevant) terms, indexed at 7% per annum for earlier/later settlement years.
Example 1: A claim settling in 2008 is deemed large if it is greater than £816,298 (£1,000,000 x 1.07-3 ).
Example 2: A claim settling in 2015 is deemed large if it is greater than £1,310,796 (£1,000,000 x 1.074).