The Civil Liability Act: one-off reporting requirements for certain motor insurers

Insurer Update - June 2023

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There is still confusion over the reporting of claims information, making compiling data a considerable challenge for affected insurers. We look at the key barriers to progress.

The Civil Liability Act in 2018 introduced amended legislation for handling motor claims such as whiplash in the courts in England and Wales. Within the Act were requirements for reporting of certain claims information. This was to help HM Treasury (HMT) and the FCA to determine the effect of the new legislation and whether policyholders had received the benefit of any cost savings.

Two years later, the Civil Liability (Information Requirements) and Risk Transformation (Amendment) Regulations 2020 introduced details to implement additional one-off reporting to the FCA. This applies to insurers who issued more than 100,000 private motor policies in England and Wales in any of the years beginning 1 April 2020, 2021 or 2022. It requires them to complete a return covering each of those years. The return for all three years must be submitted by 1 October 2023.

Two sets of data are required. The first set is factual information that needs to be audited. The second is counterfactual information, where an auditor must provide assurance that specific requirements have been followed in calculating that information.

What are the problems?

Unfortunately, neither the Act nor the subsequent Regulations are sufficiently clear on how to compile the information. And there are some apparent inconsistencies between the Act and the Regulations. What’s more, the information to be reported is not in a format in which most insurers maintain their records, so this increases the challenge for insurers extracting the information and auditors auditing and/or reviewing it. It is unclear how this data will provide relevant evidence on which HMT could assess the impact of the new legislation.

The quality and reliability of the data is also affected by the fact that many of the required reporting periods have distorted motor claims incidence. This is mainly because of Covid restrictions, which reduced the mileage driven during the various lockdown periods and the subsequent rebounds.

To help clarify the requirements, there are ongoing discussions between HMT, the FCA, the ABI and auditors. Their aim is to seek a workable solution for insurers to comply with the requirements of the Act and the Regulations. Discussions to date have been largely positive but are still ongoing, however, there is a clear willingness from all parties involved to find pragmatic solutions to the challenges outlined below. 

The challenges of gathering data

The FCA has developed reporting templates and guidance with the ABI. But these continue to be refined, particularly to ensure consistency of the information to be reported.

Various challenges remain with compiling the necessary data. Significant assumptions may be required including:

  1. Most insurers’ current annual reporting periods are not to 31 March, so they will have to recompile the data to the periods specified.
  2. Claims must be allocated to the period when they are ‘finally settled’, which might be open to interpretation. The claims information is only in relation to the third party personal injury claims element of motor claims and the related portion of legal costs. This may require a basis of allocating such costs from the total motor claims to the third personal party injury element only.
  3. For Payment Protection Orders (PPOs), which might be settled as one-off lump sums and/or annuities, it’s unclear what amounts should be reported, and in which periods, due to different interpretations of the terms ‘settled’ and ‘paid’.
  4. Premium information is required for those policies that relate to third party personal injury coverage. But insurers do not usually issue policies for only that element of coverage. This means they don’t normally set their pricing in a way that might enable a straight-forward allocation. So this absence of clear guidance may lead to an arbitrary estimation.
  5. The counterfactual information, which includes estimating how premiums and claims would have differed had the Act not been passed, causes even more uncertainty.

The format of the auditor’s report is yet to be finalised. There are major challenges with the auditability of most of the required information. And the level of assurance an auditor can provide might be limited by the nature of the information required by the Act and the Regulations.

More clarity and support needed

Auditors will seek to align their audit and/or review procedures with the legislation, but this should be proportionate in time and expense. What’s needed is a clear, acceptable basis of preparation for each section of the required reporting. These bases and the required level of materiality to be applied by the auditors in providing assurance might need input from the FCA. If there’s a change of auditors during the relevant periods, there will be added challenges from the amount of work required to analyse the period(s) before the current auditors were appointed.

All things considered, we hope the ongoing discussions on the exact templates and guidance to help insurers prepare the returns will soon bear fruit. Also needed is clarity on the audit scope, including the level of assurance that can be provided for each section of the required reporting and the respective materiality level.

With only four months to the due date for returns submission, there’s still much to resolve for insurers and their auditors. Clarity and simplicity will be important so that the cost and effort of producing this information is proportionate to its benefit. This is especially important as insurers who report under IFRS and their auditors gear up to their first period of reporting under IFRS 17.

Affected insurers must prepare for this reporting and identify obstacles in their data collation processes. They should keep up to date with the FCA’s guidance and liaise with their auditors on how they are expecting to address data issues and provide the necessary audit evidence.

If you would like further guidance on any of the issues raised in this article, please contact Neil Coulson.