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Personal Injury Claims - what the new discount rate changes could mean for you
You may have recently heard in the news the expected impact of "Discount Rate Cuts" which effect Personal Injury Claims. The following briefing from Howden UK Group Ltd is for your benefit and has been compiled to provide you with insights into the Lord Chancellor's announcement of a reduction in the discount rate, what the news means for you and/or your business and how we can support actions to mitigate the financial impacts of this outcome.
What is the Personal Injury Discount Rate?
When assessing lump sum awards for personal injury claimants, account is taken of the net rate of return (discount rate) the claimant might expect to receive from a reasonably prudent investment of lump sum compensation. The current rate of 2.5% was set in 2001 and reflects the gross redemption yields of Index-Linked Government Gilts.
What are the changes?
The Lord Chancellor announced on 7th December 2016 that a review of the discount rate would be undertaken. This was originally planned to be completed by 31st January 2017 but because of the complexity of the decision and the representations from a multitude of affected parties (including the insurance industry), this decision was put back until the announcement on 27th February 2017. The Lord Chancellor has confirmed her decision to reduce the discount rate by 3.25 points to -0.75%. The Lord Chancellor has previously conceded that any change could have "profound financial consequences". The revised rate will apply with effect from 20/03/2017 and will apply retrospectively to all current claims, as well as new incidents. A further review will be undertaken imminently in regard to the setting of rates by an independent body.
Who is affected by the ruling?
The new discount rate ruling has significant implications for insurers in respect of the potential additional costs relating to personal injury claims relating to Motor and Casualty risks. The news also affects the UK's boardrooms and employees, NHS compensation costs, the taxpayer and many other personal injury stakeholders in the UK. Existing reserves on open claims will need to be increased to reflect these changes.
Impacts to Commercial Policyholders
The reduction in the discount rate will particularly affect large personal injury claims settlements. Let us consider a case example of a thirty year old female who is disabled in an accident and cannot work again. She has no educational qualifications and it is determined she would have earned £20,000 a year until retirement at 65. Rest of life care is determined to be £100,000 a year. Under the current 2.5% discount rate the total sum award (consisting of Loss of Earnings and Cost of Care) would result in a lump sum award of £3,414,350. With the new discount rate of -0.75%, we estimate that this would increase to £8,480,400. The greatest insurance impacts within the Commercial sector will be therefore be to those policyholders with higher potential for large injury claims and/or those who choose to insure only for large losses, as these costs will be disproportionately affected by increases in large awards resulting from the Discount Rate reduction.
The impact on business and actions which can be taken
The new discount rate can only compound the upward trend in large claims. This will need to be reflected in insurance premiums. The industry has already observed the increasing costs of large claims escalating ahead of normal inflation. Key drivers are rising care costs, advances in medical science, longer life expectancy and pensionable ages resulting in annual increases which experts have assessed between 8% and 11% in these costs. Any actions which can be taken to reduce the likelihood of large losses will be key to mitigate the financial impacts of these changes, aside from the obvious benefits of business disruption.