Something important is brewing and anyone buying car insurance, business vehicle insurance or liability insurance for employees or members of the public need to understand.
When people suffer serious injuries they rightly deserve to be compensated through insurance. Many suffer such catastrophic injuries that this means they will spend the rest of their life receiving medical treatment and care. Insurance is terribly dull – I can say this as I have worked in it for over 30 years. However, it is very meaningful when people are seriously hurt and my focus has always been to focus on insuring property and protecting people. They are different.
Working out how much compensation individuals receive is complex and insurers spend inexorable amounts of times looking at the cost of care, ongoing treatment and loss of earnings as part of the equitable compensation equation. Most individuals choose to receive compensation as a lump sum. The key part here is that 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. It has been set at 2.5% by the Lord Chancellor, meaning claims have been reduced in line with this.
For reasons many are failing to comprehend fully, the Lord Chancellor and the Ministry for Justice ( MOJ) feels that the time is right to reflect changing financial and investment environments.
The discount rate impacts claims often worth millions of pounds so even a change of half a per cent will have a substantial impact.
If you look carefully at Zurich Insurance results 2016 you will see a reference to a change in the rate. It has said that it has assumed a reduction in the rate to 1% and that so far it feels no need to make a provision in its prior year reserving and is strongly reserved. The numbers are eye watering though and market changing in my view. If Zurich feel that every 1% move means reserve strengthening of circa $180m then think of the industry implications if the rate goes negative as some doom mongers believe. Uncertainty around the rate change has already seen Ageas set aside £46.7m in reserves and Direct Line delay their annual results.
The insurance trade magazine, Insurance Post, reports today that motor insurers and reinsurers could face reserve charges of £4.9bn as a result of changes to the Ogden discount rate. Analysis by Willis Towers Watson has revealed that if the discount rate for personal injury is changed from its current 2.5% to negative 0.5%, there would be a £700m per annum increase in the cost of providing motor insurance in the future.
For insurance buyers, lowering the rate means the cost of paying for personal injury compensation will increase. Costs will rise substantially and, on top of that, the increase in IPT to 12% from the summer will just be the icing on the cake. The impact on younger drivers, who typically pay significantly more for car insurance, will be horrendous. For commercial buyers, particularly hauliers, they need to think seriously about costs. Why the transport and logistics sector appears to be so laissez faire about insurance costs and taxation is a question I openly pose.
For insurers, this will test appetite for business and in my view will mean some exiting markets and if the most dire of predictions come true (and we move to a negative rate) some being unable to trade.
Dark days indeed ahead potentially. Let’s hope all interested parties are talking with each other. Not too much to ask surely?