Insurers say the new discount rate announced today will lead to higher costs
Insurers were today hit with a fresh blow after the government changed the Ogden rate to a level which could lead to more problems in the insurance market.
The government set the Ogden rate at -0.25%. Insurers had been expecting a rate of 0%.
The move could result in rate changes for those insurers that have been wrongly pricing their busienss in expectation of the 0%.
“The Lord Chancellor’s announcement today is disappointing to say the least and doesn’t provide the equality of compensation that we would have hoped for and expected,” said David Williams, managing director of underwriting and technical services at AXA, said. “A negative rate simply does not reflect the economic reality of the investment opportunities for those receiving lump sum payments.”
With many insurers having priced for a bigger change, Williams said it could bring an end to falling motor premiums and place a huge burden on the NHS.
Zurich’s chief claims officer, David Nichols, agreed, and said there will be increased costs as a result of this decision.
He said: “It’s essential that claimants get the compensation they are entitled to following an injury. However, the Government’s failure to change the discount rate to a balanced level will only serve to increase the cost and, therefore, affordability of certain types of insurance.
“This rate is likely to reduce both market coverage and affordability for higher risk customers such as road hauliers, commercial fleets, young drivers and older drivers.
“It will also have a financial impact on public liability cover for the public sector and businesses.”
Martin Milliner, LV General Insurance claims director said the decision will now only lead to further uncertainty in the sector.
“At this level we believe that claimants will remain over-compensated, thus undermining the common law principle of 100% compensation,” Milliner said. “This means that uncertainty will remain for claimants, lawyers and compensators alike as this rate will be surely challenged once again at the next review in five years’ time.”
What is the discount rate?
The discount rate, also known as the Ogden rate, governs the discount that an insurer receives when paying out claims for life-changing injuries. The pay out is a lump sum expected to cover the claimant for a lifetime. They are expected to invest it. The discount rate determines how much interest an insurer would be paying on this amount. It is deducted from the total sum to be paid.
In a statement on the London Stock Exchange, Gauke said in accordance to new legislation, the government will review the discount rate again within a five year period. These reviews will be conducted using an expert panel to ensure the rate remains fit for purpose.
Gauke said he had considered the benefits of a dual rate, with a lower short-term rate followed by a higher long-term rate after a ‘switchover period’. He said analysis had showed promising signs, but that there was not get enough evidence to adopt a dual rate.
Huw Evans, director general of the ABI, said Gauke’s decision to set the rate at -0.25% was a “bad outcome for insurance customers and taxpayers that will add costs rather than save customers money.”
He added: “A negative rate maintains the fiction that a claimant and their representatives will knowingly choose to invest their damages in a way that would guarantee losing them money.
“This will remain the lowest discount rate in the western world, leaving England and Wales an international outlier at a time when we need to boost our attraction to international capital.”
However, while insurers have been hugely disappointed at today’s announcement, London law firm Osbournes Law applauded Gauke for his decision.
Their head of catastrophic injury department, Ben Posford, said: “David Gauke is to be congratulated for resisting pressure from the insurance lobby to set a higher rate than this, which would simply have increased insurers’ profits at the expense of badly injured people.
“Investing damages that are needed to provide for an injured person is difficult at the best of times, and given the state of interest rates – which are likely to fall further in the event of a no-deal Brexit in particular – there was no justification for raising the discount rate any higher.”
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