Lord Chancellor Liz Truss shocked the insurance sector in February when she announced that the discount rate, otherwise known as the Ogden rate, would be cut from 2.5% to minus 0.75%.
The rate, designed to ensure injury victims receive the right pay out, had not been moved since 2001 and affects motor and liability claims.
The change came into effect on 20 March and left insurers slashing their profits as they attempted to cushion the burden of additional personal injury pay outs.
Truss commented when the change was announced on 27 February: “The law is absolutely clear – as Lord Chancellor, I must make sure the right rate is set to compensate claimants.
“I am clear that this is the only legally acceptable rate I can set.”
As it stands the impact is going to be even greater as insurers scramble to ensure there is enough in reserve for claims to be paid at the minus 0.75% rate actually set.
The insurance sector, while united in stating that personal injury claimants deserve the right compensation, reacted angrily to the change.
The Association of British Insurers (ABI) called the move “crazy”. It described the new calculation as being based on a “broken formula” and “reckless in the extreme”.
ABI director general Huw Evans commented: “We have repeatedly warned the government that this could lead to very significant price rises, with younger drivers in particular likely to find it much harder to get affordable insurance.
“It is also a massive own goal that lands the NHS with a likely £1bn hike in compensation bills when it needs it the least.” (see box below).
Key reactions“This decision today to change the discount rate for personal injury makes it even more important that the government freezes IPT for the term of this Parliament. We advise customers to speak to their insurance broker about the costs and cover of their insurance”
Steve White, CEO, Biba
“We are concerned by the extent of the discount rate cut, its timing and the degree of unintended consequence”
Keith Richards, managing director of engagement, CII
“I am pleased that the Chancellor set out in stark terms the financial impact of the decrease in the discount rate. Hopefully even more people will become aware of this deeply regrettable and ill-advised decision and support the insurance industry in its efforts to achieve a sensible way of calculating compensation for the seriously injured”
Jon Dye, CEO, Allianz Insurance
“This announcement, on top of the recent increases in insurance premium tax, will make redundant any savings to premiums as a result of the government’s personal injury legal reforms, which were anticipated to generate approximately £40 saving per motor insurance policy”
Mohammad Khan, UK general insurance leader, PwC
This change today [27 February] will have massive impacts for customers – motorists, businesses and public services – and at a time when they can least afford it Tulsi Naidu
Steve Treloar, managing director of general insurance at LV, stated: “We absolutely believe that people who are seriously injured should be properly compensated but the method used by the Ministry of Justice to set the discount rate is obsolete and in need of reform. We urge the Ministry to work with all parties to agree a fair way forward.”
The market-wide negative responses and the vociferous reaction from the sector forced a meeting between Chancellor of the Exchequer Philip Hammond and 15 insurance CEOs on 28 February, where they called on him to intervene.
Article is care of www.insuranceage.co.uk