S&P Global: Polish motor insurers face a decade of uncertainty due to retrospective bereavement damages claims
Please find below the S&P Global study:
Over 12 months, average prices for Poland's mandatory motor third-party liability (MTPL) insurance have shot up by about 47%. S&P Global Ratings attributes part of this spike in policy prices to the rising cost of bodily injury compensation claims in Poland over recent yearsPolish motor insurers have also seen fierce competition and inflation in spare parts claims.
A 2008 change in the civil code, combined with subsequent developments in case law, has meant that Polish insurers are facing a material increase of new claims relating to policies written before 2008, which were priced to reflect the then-current claims regime. We expect the burden of compensating legacy claimants from this period is likely to prevail, but to gradually dissipate over the next 10 years.
The effect has been exacerbated because historically, claims in bodily injury cases have been lower than those in more developed markets, such as Germany, France, Italy, or Czech Republic. Case law practice in Poland is also still developing and in the past few years, bodily injury settlements have become more frequent and unpredictable, making them harder to manage and reserve for insurers.
The Polish Financial Oversight Commission, which supervises financial institutions operating in the country (Komisja Nadzoru Finansowego; KNF), also published recommendations on the principles of servicing bodily injury claims in 2016. Although this will increase the cost of meeting these claims, the regulator's intervention may also improve predictability.
Our assessment of the risks stemming from claims settlement is part of our view of product risk, which we consider when we assess industry and country risk. We view product risk in Poland's P/C insurance sector as moderate, which makes it a neutral factor in our insurance industry and country risk assessment (IICRA). This is in line with product risk in some more-developed insurance markets, such as those in Germany, France, Italy, or Czech Republic. The key difference is that individual bodily injury claims in Poland have historically been lower than in other markets. Average bodily injury claims in 2016 were about 26% of total MTPL claims.
Over the past few years, claims settlement risk has risen. We chiefly attribute this to Poland's still-developing case law, which has increased uncertainty around bodily injury settlements, making it more difficult for insurance companies to manage these risks. Since 2014, the unpredictable claims settlements and higher frequency of bodily injury claims has started to weigh on the performance of the Polish insurance sector. In addition, uncertainty regarding the legal framework has increased the sector's vulnerability. These factors could lead us to revise down our view of product risk if they persist at a level that sustainably affects the industry's operating performance.
Under The Polish Legal Framework, Uncertainties Regarding Claims Settlement Persist
Compensation is based on case law, but the amount can vary significantly
Under Polish law, compensation for personal injuries can be based on both pecuniary and nonpecuniary damages. Pecuniary damages include prospective loss of earnings and profits, or the costs of future care. Insurers are required to reimburse victims for all the costs resulting from an insured injury, including paying a certain sum in advance. They may also be required to pay an annuity, if the injury affected the victim's future prospects. Nonpecuniary damage includes physical and psychological pain and suffering. For this, courts typically require that insurers pay victims a lump sum in compensation. The court sets the amount of this payment.
Although the Polish legal system specifies how to compensate for pecuniary and nonpecuniary losses, it does not offer any compensation tables that courts could use when assessing payments for nonpecuniary damages. Compensation is supposed to be based on case law, so that similar cases guide the amount of redress due in subsequent claims. In practice, however, court decisions on the amount due can vary significantly, even for similar cases.
Access to bereavement damages has widened since they were introduced in August 2008
Much of the current increase in bodily injury claims originates from compensation paid for bereavement damages. In August 2008, the Polish Civil Code introduced nonpecuniary damages (bereavement damages) for the closest family of the deceased. Inevitably, the families who lost their relatives before this paragraph came into force were disadvantaged. Over the past couple of years, several Supreme Court decisions have paved the way for the payment of bereavement damages to be extended as far back as August 1997. According to the Polish statistics office (GUS) more than 71,000 people died on Polish roads between 1997-2008.
Because the code does not clearly set out who is entitled to be considered "the closest family of the deceased," each court must identify who is eligible for bereavement damages, on a case-by-case basis. As a result, the courts often widen the circle of eligible persons to include more-distant relatives. In our view, this further increases uncertainty regarding the total claim amount. Other EU countries define the circle of those eligible to claim redress much more clearly, and more narrowly. For example, in the U.K., a one-off payment is divided among the beneficiaries, who are explicitly named in the law.
Some of the Western European countries are using compensation tables
Many of the more-developed Western Europe insurance markets apply a rule-based system to calculate redress for victims of bodily injury. Settlement of bodily injury claims is based on predefined compensation tables, making claims severity much more predictable for insurers. In Spain, the use of Baremo tables to assess redress has considerably restrained the volatility of third-party liability claims. Italy and France also use indicative compensation tables to help judges calculate damages for bereavement. Although these tables are only indicative, and judges can incorporate other parameters in awarding damages, most courts have followed the tables closely. Again, this reduces uncertainty for insurance companies.
There Is Considerable Incentive To Claim
According to the Polish insurance association (PIU), on average, bereavement damages for deaths after 2008 have risen to about PLN62,000 (around €14,000). Compared with some other Western European countries, Polish compensation is still low, in absolute terms; for example, in Italy, compensation can easily reach several hundred thousand euros per case. However, PLN62,000 is 15 times the average monthly salary in Poland. In England & Wales, by contrast, bereavement damage is a single lump sum of £12,980 (around €14,300 or about six times the average monthly salary in the U.K). Under German law, compensation for bereavement is typically not paid at all, and where available, redress is only paid in exceptional cases.
Most bereavement damage claims have historically been settled outside the court system--this usually results in an amount below the PIU's average being paid in redress. By contrast, when the final settlement is decided through a court, the amount paid may be two or three times the PIU average. More troublingly, in Poland the settlement of such cases can be reopened, as long as the amount of redress was not assigned by court, at any time until 20 years after the accident.
While courts have a role in assessing and assigning the appropriate redress for bereavement damages, we consider that their decisions have led to similar cases being treated differently. In the past few years, many firms have been established to help the families of those bereaved to claim redress from insurers in Poland's very loosely regulated market. This suggests that payments could increase materially if claimants decide to reopen cases and challenge the amount of redress they received through the courts and could cause prices to rise further.
Retrospective Claims Place A Heavy Burden On The Market
Extending the claims period back to 1997 has opened the floodgates to retrospective claims. About a third of bodily injury compensation claims in 2016 concern deaths that occurred before August 2008, when the Polish Civil Code introduced bereavement damages (source: Polish Insurance Guarantee Fund). Insurance companies did not price pre-2008 contracts to include the risk of paying a type of claim that did not yet exist. As a result, any increase in compensation for such cases has an immediate effect on profitability.
he long-delayed liabilities imply additional burdens for insurers, beyond the size of the potential pool of claims. The time lag implies extraordinary claims handling costs and makes it more difficult for insurers to assess the pain and suffering of relatives.
It is particularly difficult to collect the facts and documents related to events that took place so long ago. In some cases, archival documentation from insurance companies or other relevant parties may already have been destroyed. As a result, old cases are more time consuming for insurers' claims settlement teams and this increases costs.
Cases not settled through the courts may be reopened at any time until 20 years after the accident, under Polish law. As a result, we believe that these old claims will only affect the market for bodily injury compensation claims temporarily. In mid-2017, the limitation period will start to kick in for the earliest of the potential cases. Thereafter, the amount of potential cases should gradually fall.
We anticipate that the amount of redress for old claims could increase further in the short term, as compensation firms increase their activities. Some cases will also take time to settle through the courts. Thereafter, however, we expect the amount of legacy claims to gradually decline over the next 10 years, assuming bodily injury legislation does not change.
KNF's 2016 Recommendations Will Increase The Cost Of Claims
In 2016, Polish insurance regulator KNF issued recommendations to insurance companies on the process for determining and paying compensation for bodily injury claims for MTPL insurance. We understand that KNF has been monitoring the implementation of its recommendation since the start of 2017.
The recommendations clarify how to service personal injury claims and require that insurers clearly explain to policyholders how the amount of compensation was calculated. However, the recommendations do not define how much insurers should pay; this remains a matter for the insurer to determine.
In our view, these recommendations are likely to sustainably increase the cost of MTPL bodily injury claims for the entire market, but also improve the predictability of claims. We expect courts to examine the insurer's procedures for calculating compensation when deciding if it was a fair offer, for example. We also expect to see more compensation claims being decided through mediation, and a move away from court involvement.
The first market estimates suggest that compensation across the market will rise by about PLN300 million a year, but the real impact has yet to be seen. In our view, the impact of the recommendations will vary across Polish insurers.
Market Conditions Will Continue To Change
At present, the different participants in the Polish insurance market are considering how to handle the new, more transparent marketplace implied by the recommendations. In our view, there are no quick fixes--the impact of each possible solution will only become apparent over time. Although policymakers could implement some solutions in the short- to mid-term, we consider that it is questionable how sustainable these solutions would be in the longer term. Any long-term solution will need to tackle the root cause of the uncertainty affecting the market.
As the macroeconomic environment in Poland alters, the development of bodily injury claims will also change. For example, as case law in Poland develops, it could extend the definition or scope of bodily injury claims, increasing the cost of compensation. Demographic trends could also cause medical inflation to become a much more important component of bodily injury claims in the coming years.
What Solutions Might Be Applied
One short-term, though politically unpopular, solution might be to increase penalties for traffic offenses--the penalties are currently among the lowest in the EU. However, without longer-term safety programs it is not clear whether higher fines would lead to a sustainable improvement.
In our view, road safety improvements related to improved infrastructure, especially the building of well-designed highways, could partially mitigate the effect of rising average salaries in Poland and longevity. However, because infrastructure projects take time and money to build, we expect that highways would only gradually improve road safety. The full impact would not unfold until a decade had passed.
Vehicles in Poland are typically older than those in Western Europe, and carry fewer safety features. If the vehicle fleet were modernized, the number of accidents would likely fall. The government has considered speeding up modernization by implementing additional taxes on importing old used cars. A tax on old cars could also probably push some people to use public transportation, instead of driving.
In addition, if potential claimants are in a better economic position, there may be less of an incentive for them to claim for bereavement damages. That said, rising salary levels and prolonged longevity could cause pecuniary damages arising from bodily injury claims to rise, even as nonpecuniary damages ease.
Johannes Bender, S&P Global Ratings, Financial Services Ratings