Personal injury claims: Changes to the discount rate

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Fleet insurance broker specialist Steve Green, a director at Anthony Jones, takes a look at how the new discount rate could effect commercial fleet operators.

The decision to change the way in which large personal injury claims are calculated has clear upward implications for insurance costs and thus buyer affordability.

Commercial buyers generally but especially those with obvious high risk exposure such as Manufacturers, Construction and Transport buyers of liability policies are likely to see significant increases in premiums. Risk management and rigorous focus on policies and procedures continue to be critical. The financial implications of a serious workplace accident and also regulatory actions are accelerating fast.

What is the Discount Rate?

When people suffer serious injuries they rightly deserve to be compensated through insurance. Long term medical treatment and care alongside loss of earnings from employment is a complex equation to calculate.

Most individuals choose to receive compensation as a lump sum and this is adjusted to take account of how much individuals can be expected to earn each year when that lump sum is invested. This adjustment is called the discount rate (or Ogden rate) and has been unaltered for 16 years at 2.5% by the Lord Chancellor, meaning claims have been reduced in line with this. On 27 February the current Lord Chancellor Elizabeth Truss announced that the discount rate would be reduced to -0.75% effective from 20 March 2017.

Why has the rate been altered?

The threat of legal action from personal injury lawyers forced a review of the discount rate for personal injury claims by the Lord Chancellor. The Association of Personal Injury Lawyers articulated that seriously injured people have been "undercompensated for years". The arguments are currently being had around basic principles of investment decisions and how the rate should be set in the future.

Who is affected?

People suffering large catastrophic injuries, consumers, businesses, insurers and taxpayers are all affected. The Association of British Insurers (ABI) estimate that up to 36 million individual and business motor insurance policies could be affected and have been scathing on the disregard the decision has made to costs and the principle of affordable insurance.

The government has set aside £5.9bn to “protect the NHS” from changes to the Ogden discount rate so taxpayers are also affected.

The UK is the only major economy to have set a negative rate thus leaving businesses with a competitive disadvantage of increased insurance costs. This significant reduction could increase costs for insurers and companies with in two ways:

  • Claims reserves for past claims that have not yet been paid will have to rise.
  • Future claims costs for large personal injuries will also rise.

Insurers are also affected and we have seen share price volatility and revised results reporting. Aviva posted an exceptional charge of approximately £385m as a result of the change; Direct Line impact was £230m to its full year results; QBE impact was £129m to its full year results; and Admiral impact was £105m to its full year result.

Most observers say impact may worsen as insurers negotiate reinsurance agreements and some claim rate increases are eye watering.

Can you show me an example of the changes?

Allianz publically reported a sizeable personal injury claim for a 51 year old. The future loss component of the reserve on the new discount rate was £5.1m, under the previous discount rate it would have been £3.8m.

If the claimant was much younger then the loss would need to cover decades meaning the difference would be several million.

What's going to happen now?

A six-week consultation on the discount rate to review the current law to consider changes has been announced as there is such a gulf of opinion across the insurance and legal professions.

Premiums for Motor insurance and general business liability covers are going up with immediate effect and some insurers are avoiding or withdrawing completely from some exposures.

Most observers say impact may worsen as insurers negotiate reinsurance agreements and are forced again to increase premiums

What can you do to help mitigate the changes?

Commercial buyers more than ever need to demonstrate understanding of risk, how this is managed and who is responsible for constant focus.

Brokers will necessarily want more information on risk management to represent clients in the best possible light to insurers. Insurers risk selection criteria and pricing will be tightening up.

Think about the planning process for insurance covers and costs. Review indemnity limits you need to buy and plan for pricing increases with your broker. 

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