How could the discount rate increase affect your business?

Changes to the so-called ‘discount rate’ coming into play on 20th March will have a significant impact on insurance costs, but how will these changes affect your business?

What is the discount rate?

The Ogden ‘discount rate’ is a formula used to calculate compensation for personal injury claims. Essentially, when a compensation lump sum is paid to a claimant, the sum owed is reduced slightly based on the additional money the recipient could make if they invested it. The formula is based on gilt yield, which is the rate of return on government bonds specifically. Because current returns for these bonds are negative, the Ministry of Justice is reducing rates from 2.5% to minus 0.75%. This move was unexpected as the rate has been the same since 2001, with many experts believing it would change by between 0.5% and 1%.

There has been widespread criticism of this change in the insurance industry, as it will increase costs for insurers by millions of pounds.

Director General of the Association of British Insurers, Huw Evans, said: “Cutting the discount rate to -0.75% from 2.5% 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.”


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How could this change affect your business?

Insurers may look to ring-fence personal and commercial lines of insurance across the board to account for these increases, with car and liability insurance likely to bear the brunt of the increase.

  1. Motor insurance
    According to Mohammad Khan, insurance leader at PwC, average insurance premiums are likely to rise by between £50-75 as a result. If you insure company cars and vans or operate a fleet business, it’s likely your business will be impacted by this change in the form of rising insurance costs. This will be particularly significant for companies where vehicles are a vital part of their modus operandi, such as taxi companies and delivery-orientated businesses.
     
  2. Liability insurance
    Smaller businesses could also be affected by increased commercial insurance rates on the policies they use to protect themselves against liability claims. All businesses must have employers’ liability insurance to a value of at least £5 million from an authorised insurer. Many businesses have additional liability insurance to protect them to a greater amount and for a wider range of circumstances, meaning that the severity of this increase will depend on the nature and type of your business.

The trend of rising insurance costs

These increases come at a time when motorists are already paying record-high premiums. According to the AA, the average motor premium in the UK has risen by 17% over the last two years. These increases are predominantly due to steady rises to Insurance Premium Tax (IPT), which has increased from 6% to 10% and is due to rise to 12% in June.

On a more positive note, a crackdown on personal injury claims means that insurance costs will be cut by an estimated £1.2 billion a year. The change, which sees the limit for small personal injury claims raised from £1,000 to £5,000, will mean more of these cases go to the small claims court, without the need for legal representation. In addition, many settlement claims for whiplash and other minor injuries will be replaced with money towards rehabilitation of the injury in question.

Insurance prices plunged after a similar crackdown on personal injury claims in 2012, however, alongside the changes to discount rate and IPT, it’s unlikely consumers or businesses will notice this decrease in their premiums.

At Stride we offer a range of insurance cover which could benefit your business. If you’re looking for motor insurance or liabilities insurance please get in touch.

Sources:
https://www.abi.org.uk/News/News-releases/2017/02/BI-RESPONDS-TO-CHANGES-IN-PERSONAL-INJURY-DISCOUNT-RATE

http://money.aol.co.uk/2017/03/05/why-you-need-to-look-at-your-car-insurance-policy-now/

https://www.theguardian.com/business/2017/feb/27/nhs-faces-new-1bn-annual-bill-after-reckless-change-to-injury-payouts

https://www.lv.com/atheart/news/the-personal-injury-discount-rate-debate-whats-it-all-about

https://www.gov.uk/employers-liability-insurance

Published: 10th October 2017
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