Russell Scanlan reacts to new lower discount rate for personal injury claims
Mike Dickinson, Sales and Marketing Director, reviews the reactions of an industry in shock following this week’s government announcement of a change in the compensation discount rate, and advises businesses to take heed and budget for the increased costs now.
This week the Lord Chancellor shocked the insurance industry by announcing changes to personal injury compensation payments, with the inevitable result of increased cost of insurance to customers.
As of March 20th, the Discount Rate – a calculation which takes into account the interest claimants can expect to earn on the amount of compensation money they receive if they invest it – will be lowered from 2.5 per cent to -0.75 per cent. Already, a delegation of 12 insurance company CEOs have arranged to meet with the Justice Secretary Liz Truss to voice their concerns about the change.
The Discount Rate has not been changed since 2001. Since then, the insurance industry has put forward its case that lowering the rate will increase insurance costs for businesses and individuals and will thus have a definite impact on the affordability of certain types of insurance. However, against a backdrop of commonplace low investment returns the decision has officially been made by government to lower the rate.
Our advice to businesses is simple: plan ahead now for the rise in premiums which will come as a result of this rate change. It is unclear how much premiums will rise, but it is certain that they will and they could be significant. In particular, this change will impact motor (rumours of a 20% hike in premiums are already circulating), employer liability and other forms of liability claims, so be prepared for these to cost more after March 20th.
Insurers will have to revisit claims reserves that are outstanding and assess them individually in light of this new legislation. For example, a £1m claim could now get settled for as much as £1.8m – so there needs to be enough in the reserve pot to cope with this. The Discount Rate decrease is causing serious concern within major insurers and the worst case scenario would be if some insurers didn’t have the financial reserves to cope with it.
When changes such as this hit the marketplace, it is wise to assess all of your insurance policies and book a meeting with your insurance broker to make sure you have the most cost effective and appropriate arrangements in place. Using a broker means you are going to get the most competitively priced policy, which is tailored to your business.
If you are a business with a high claims history, it is now even more important to make sure your ducks are in order in terms of your workplace insurance policies. Many businesses worry about the eventuality of a big claim, but with this new legislation in place, small claims will quickly add up too. It’s advisable to talk to your broker to make sure you have a good claims process established and are prepared for the potential increase in cost of personal injury claims cover.