How motor and liability insurance claim changes may affect you and your business
The Ministry of Justice has made changes to the ‘Ogden discount rate,’ which provides a framework for calculating compensation pay-outs for those with serious personal injuries, who are facing long-term loss of earnings. The new rate has just come into effect, as of 20th March 2017.
The discount rate is a percentage reduction that insurers apply to the lump-sum compensation amount to allow for the estimated return on investment on this sum. What this change essentially means is that those suffering from serious injuries will receive significantly higher compensation payments than before. Having been set at 2.5% in 2001, the rate has moved to minus 0.75%.
Whilst at first glance this may appear a modest percentage movement, the impact on claim payments will be significant. Take, for example, a 20-year-old who is seriously injured at work and pursues a claim against his employer. His claim would include continued loss of earnings of £25,000 per annum until retirement age at 65. On the basis of the 2.5% discount rate, this would equate to a loss of earnings claim of £639,750. However, on the basis of the new minus 0.75% discount rate, the resulting loss of earnings claim is £1,200,375 – equating to an additional payment of £560,625.
The change relates to any claim settlements post 20th March 2017, requiring insurers to make significant increases to their current claims reserves. The Association of British Insurers estimates the total cost of this change to be as much as £7bn to insurers. Separately, Downing Street has acknowledged that the projected £1bn impact on the NHS for higher compensation bills relating to medical negligence claims is “broadly in the right ball park”.
This will ultimately impact policyholders. An increase in claims reserves for motor and liability policies will inevitably lead to increased premiums. Whilst it’s too early to say for certain what the scale of increase will be, estimates range from 5% to 20%.
There is still a lot of uncertainty around the full impact of this rate change, with the government set to consult further.
So the best thing for businesses to do is proactively review their risk management strategies to ensure they do all they can to minimise claims frequency and severity, both of which have a direct impact on insurance premiums. Here are some initial steps to consider:
Review your insurance cover, with the support of a reputable broker, who can best advise as to how to mitigate any potential premium increases without compromising on important cover.
Don’t be tempted to cut corners to save money – reducing your policy cover may lower costs, but could expose your business to claims that exceed your cover limits.
A professional broker can discuss ways to help you control costs without exposing your balance sheet unnecessarily.
Shop around to try and get the best deal – use an independent broker with multiple insurer relationships, or brief a couple of brokers to get you that coverage of the market.