UK insurance industry outraged by “crazy” Lord Chancellor discount rate move

The UK insurance industry has expressed its concern over the Lord Chancellor’s decision to change the Ogden discount rate to -0.75 percent from 2.5 percent.

The so-called Ogden tables detail figures to be used to multiply the annual cost of a damage to be awarded. It is used to calculate compensation awards for serious personal injuries.

The discount rate has remained unchanged since 2001.

In a Feb. 27 press release by the Ministry of Justice, the Lord Chancellor and Justice Secretary Elizabeth Truss admitted that as well as seeing compensation payments rise, it is also likely to have a significant impact on the insurance industry and a knock-on effect on public services with large personal injury liabilities – particularly the NHS.

Huw Evans, director general of the Association of British Insurers (ABI), said: “Cutting the discount rate to -0.75 percent from 2.5 percent is a crazy decision by Liz Truss. Claims costs will soar, making it inevitable that there will be an increase in motor and liability premiums for millions of drivers and businesses across the UK. We estimate that up to 36 million individual and business motor insurance policies could be affected in order to over-compensate a few thousand claimants a year.

“To make such a significant change to the rate using a broken formula is reckless in the extreme, and shows an utter disregard for the impact this will have on consumers, businesses and the wider operation of the insurance market.

Direct Line Insurance Group, Britain's largest motor insurer, said it expected profit before tax to fall due to a change in the discount rate, Reuters reported.

The company said it expects profit before tax to fall by between £215 million and £230 million after reinsurance recoveries.

Mohammad Khan, UK general insurance leader at PwC, commented: "The Lord Chancellor's announcement on the Ogden rate change to -0.75 percent was not anticipated by the insurance industry and is more than they were expecting. Unfortunately, this announcement will have a significant adverse impact on motor insurance prices that drivers pay and also commercial insurance rates paid by small businesses.

"As a direct result of this change, we anticipate an increase of £50-£75 on an average comprehensive motor insurance policy, with higher increases for younger and older drivers – potentially up to £1,000 for younger drivers (18-22 year olds) and a rise of up to £300 for older drivers (over 65 years old).

"This announcement, on top of the recent increases in insurance premium tax, will make redundant any savings to premiums as a result of the government’s personal injury legal reforms which were anticipated to generate approximately £40 saving per motor insurance policy.

"There will be a dislocation in the pricing due to the fact that different insurance companies have different reinsurance programs – insurers with lower levels of reinsurance may not need to increase their pricing immediately, creating pricing opportunities within the market. In any case, due to the competitive nature of the insurance industry, policyholders should be able to reduce any impact by shopping around but younger and older drivers will see significant price increases regardless.

"As has already been announced by a few companies, some insurers had provided for a discount rate move to 1.5 percent or 1 percent. The announcement of a move to -0.75 percent means many insurers will need to further increase their reserves, potentially impacting expected results for year-end 2017 for those who have already announced their results and year-end 2016 for those that have still to report.

"The announcement will also impact reinsurance pricing by pushing prices up for motor and liability reinsurance cover. This may impact the business models of companies that rely on low layers of reinsurance who will be faced with much higher costs of doing business after they renew their reinsurance.

Peter Walmsley, partner at law firm Clyde & Co, added: “While we recognise that the people affected by this decision are severely injured and great care must be exercised, the government’s decision will result in gross over-compensation based on the Ministry of Justice’s use of an unrealistic and outdated legal framework. Even in its attempt to create certainty, the government has failed. It’s going to make cases very difficult and will probably delay the compensation process.

“It’s important to note that there is no mandatory requirement for an injured party to behave in a risk averse manner. This means they will be compensated on that basis but could make their investment decisions on an entirely different basis.

Keith Richards, managing director of engagement at the Chartered Insurance Institute, said: “We are concerned by the extent of the Discount Rate cut, its timing and the degree of unintended consequence. There is no escaping that this reduction will ultimately be borne by the premium-paying public which may discourage many from insuring against the risks we all face. It particularly comes at a time when both insurance and protection gap issues are being highlighted, and premiums are being affected by other big regulatory developments such as Solvency II implementation, and rises in Insurance Premium Tax. Insurers will undoubtedly work hard to soften the blow on customers through efficiencies but there is only so much they can be expected to do. If a correction in the Discount Rate really is necessary, we would have preferred a gradual soft landing rather than a cliff-edge plummet.”

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