UK insurance premiums could rise following Government ruling
The cost of some insurance in England and Wales could increase following recently announced changes to the Ogden discount rate.
What is the Ogden rate?
The discount rate is used by courts applying to lump-sum compensation payments awarded to personal injury or fatal accident claimants for future losses. The compensation is reduced by the value of the discount rate, which is the assumed rate of return on investing the lump-sum.
The decision to reduce the discount rate is likely to increase costs for insurers who might then pass on some of these costs to UK policyholders. Employers’ liability, public liability, motor insurance (personal and commercial) and also healthcare are most likely to be affected as they include a high proportion of long-term injury claims.
So what happened?
The discount rate had been set at 2.5% since 2001. However, on 27 February 2017 the Lord Chancellor and Justice Secretary Elizabeth Truss announced that the discount rate would be reduced to -0.75% and that the new rate will come into effect on 20 March 2017. This significant reduction could increase costs for insurers as the cost of future claims will rise and the cost of current claims that haven’t been paid may rise.
The Association of British Insurers (ABI) called the reduction in discount rates a “crazy decision”. The personal injury lawyers’ trade group, however, said it was “long overdue”. The Ministry of Justice said it had no choice under the current law.
How could this impact consumers and businesses?
As it stands, it’s unclear exactly how much the cost of some insurance might be affected by this change and any change in the cost of insurance may not be solely the result of this discount rate reduction.
In the media, the following estimates have been provided:
- The Association of British Insurers (ABI) estimated that up to 36 million individual and business motor insurance policies could be affected. They also estimated the total cost to insurers in increased liabilities could be as much as £7bn.
- Price Waterhouse Cooper has predicted that the cost of an average comprehensive motor insurance policy will rise by up to £75 which will also bring higher increases for younger drivers and older drivers.
- Admiral Insurance estimated the change in discount rate could cost them as much as £175m, while Direct Line said it would reduce profits by up to £230m.
- According to HM Treasury, where negligence claims are made against the NHS, the bill could rise by £1bn. However, the NHS Litigation Authority will be compensated for any extra cost, said the government.
The Chancellor of the Exchequer Philip Hammond will be meeting with representatives of the insurance industry to assess the impact of the rate change and there will be a consultation before Easter to consider options for reform.
Artemis Insurance Brokers will provide a further update, but if you are concerned or would like to discuss this, please contact us on 020 8691 5000.
We’ll continue to help our customers on how best to manage and improve their risks.
RICHARD J. CLIFFE - Sales & Marketing Manager
☏ 020 8619 5004
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