The government is expected to announce next week its planned changes to the personal injury compensation discount rate, which has been described by Willis Towers Watson as a “pressure cooker waiting to blow” that could negatively impact the insurance industry.
According to the broker’s analysis, motor insurers face a material one-off reserve charge of about £4.9 billion if the Lord Chancellor adjusts the personal injury discount rate to negative 0.5%.
Reinsurers will be particularly affected, but UK motorists will be required to fund the cost of the discount rate change by paying £20 and £55 per policy per year.
“As a result, it appears unlikely that motor insurance is going to get cheaper anytime soon,” said Willis Towers Watson director Stephen Jones.
Also known as the Ogden rate, the personal injury rate is taken into account by courts when they calculate the size of compensation awards and how much interest the money will earn when it is invested – the higher the rate, the lower the initial lump sum required.
The discount rate has been set and unchanged at 2.5% since 2001 even though interest rates have fallen sharply in recent years. As a consequence, pressure has been building and has reached an “unsustainable level,” according to Willis Towers Watson Andy Staudt.
“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,” he added.
Willis Towers Watson believes that adjusting the discount rate to 1% is a more feasible move, which would result in a one-off impact of £1.7 billion and about £200 million per annum increase in the cost of providing motor insurance. Policies would increase between £5 and £20 per policy per year
Related stories:
Government suspends decision on personal injury discount rate
