Insurers have been successful in influencing the government to review the personal injury discount rate, which has taken its toll on their finances. A revised rate will ensure claimants receive fair compensation, is expected to reduce claims costs for insurers, and will enable rate savings to be passed onto customers.
Following the insurance industry’s backlash, the Treasury Minister has indicated the government may change how the personal injury discount rate is set.
In February 2017, the Lord Chancellor announced changes to personal injury compensation payments. The discount rate (also known as the Ogden rate) which is used to determine compensation pay-outs when people suffer serious injuries was lowered from 2.5% to -0.75% from March 20, 2017.
The industry was unprepared and shocked by the change, evidenced by its 2016 financial results. Insurers published their financial results both including and excluding the rate change, highlighting large losses. This is because insurers had to revise their finances and increase their reserves in acknowledgement that future claims costs would rise. Aviva for instance took a hit to its 2016 (IFRS) profit after tax of £385m. Direct Line published a £217.3m reduction in pre-tax profits. LV=’s general insurance business also took a £139m hit to strengthen reserve releases. The overall cost to insurers and reinsurers of the UK’s change in the personal injury Ogden discount rate is estimated at £3.5bn across all lines of business, according to Ernst & Young.
As a result of the fallout the insurance industry lobbied for a consultation. The push was successful; a consultation into how the discount rate is calculated was conducted by the Ministry of Justice from March to May 2017. The government is now considering moving away from a mechanism that has grown outdated and, with negative returns on interest-linked gilts, has lost its connection with the way people invest in the real world.
This will be positive for both insurers and customers. It will ensure claimants receive the compensation they require going forward. It is expected following the consultation that the discount rate will increase, meaning claims costs will reduce for insurers. This will additionally pass on benefits to customers who have seen price rises for personal injury products, as with lower claims costs insurers can lower insurance premiums.
A rate change has been stressed, in particular for motor insurance. The government has introduced a Civil Liability Bill which aims to reduce fraudulent whiplash claims and reduce insurance costs for customers. The industry had repeated that any benefit seen in reducing whiplash will be counteracted by the rise of the discount rate, passing on no end benefit for consumers. A review of the discount rate alongside the Civil Liability Bill is therefore necessary to allow for savings.
By Danielle Cripps, General Insurance Analyst