Discount rate cut hit to insurers and their reinsurers will spark rate rises, consulting firm says

discount rate cut

Insurers and reinsurers face a one-off discount rate cut hit of £4.9bn if Lord Chancellor Elizabeth Truss cuts the personal injury discount rate to -0.5% from its current 2.5%, Willis Towers Watson (WTW) estimates.

The consulting and broking firm said that in addition to the one-off £4.9bn hit for strengthening reserves, the industry would also face a £700m-a-year increase in the cost of providing motor insurance in the future.

Truss is expected to announce the discount rate cut this month, but despite some clues it is still uncertain where the cut will fall. There are some suggestions that there could be a negative discount rate.

WTW estimates that if the rate is lowered to 1% from 2.5%, the one-off reserve hit would be £1.7bn and the annual cost increase would be £200m.

WTW director Andy Staudt said: “Instead of being reviewed and updated on a regular basis to ensure compensation remains fair reflecting prevailing economic conditions, the Ogden rate has been left unchanged for 16 years.

“As a consequence, pressure has been building and appears to have reached a politically unsustainable level. The immediate impact of trying to defuse this pressure now will be painful in the short term as reserves for past claims that have yet been paid would have to rise, while the costs of future claims would also go up.”

He added: “Whatever the government decides in the next week, perhaps the key lesson is that this rate should be either regularly reviewed and revised or pegged to an independent economic indicator so that we do not find ourselves in a similar position in the future – a pressure cooker waiting to blow.”

Consumer hit

WTW said that the reserve hit would affect reinsurers in particular, but added that a “sizeable portion of the cost will be borne by consumers “by necessity”.

The consulting firm expects consumers to face price increases of between £20 and £55 per policy to fund the hit, depending on how quickly the industry looks to bolster its capital.

WTW director Stephen Jones said: “it appears unlikely that motor insurance is going to get cheaper anytime soon with rates up around 14% last year and perhaps a further increase of between 13% and 19% during 2017 if the response by insurers to such an outcome were to be added to underlying inflationary effects.”