What does this mean for you and your business?
You may recently have read in the press that the Lord Chancellor has amended the discount rate provided in respect of personal injury claims from 2.50% to -0.75%.
This change has been made to protect the position of claimants who cannot rely on high investment returns in the current investment environment.
Prior to the change, insurers were allowed to discount the amount of compensation awarded by 3.75% per year to reflect an investment return that should be able to be generated when lump sum payments are invested.
The change to the discount table has resulted in much higher costs to insurers as a consequence.
For example, a 21 year old male who has been seriously injured at work. His prognosis is a future of nursing care; his claim would include loss of earnings until the age of retirement as well as compensation for the injury. He is awarded £9,072,028 based on the Ogden rate of 2.5%. With the new rate of -0.75% the nursing care and loss of earnings dramatically increases to £20,023,103 due to the compounding effect.
As you can see from our example, the change in the Ogden discount rate from its current +2.5% to -0.75% reflects a significant increase in the total settlement of a claim.
This has caused much wailing and gnashing of teeth amongst insurers as the new rates apply from 20/03/2017 retrospectively. The increase in costs has not been reflected in the premiums that have been collected.
The three main areas of insurance where this will have the most effect are motor, both private, commercial and fleet, public and product liability and employer’s liability.
We have already seen that most major motor insurers have increased their rates, most by at least 10% as an immediate reaction. We further expect to see increases in the near to medium term in respect of liability insurances.
In addition, we would advise all businesses to look at their indemnity limits to really ensure that they remain sufficient for their requirements given these changes.
A standard employer’s liability insurance policy will offer £10,000,000 of cover. If you have an employee that is injured at work, perhaps the same as the example given above, you could find yourself on the receiving end of a £10,000,000 compensation bill, enough to close most small to medium enterprises permanently.
The good news is that additional coverage is readily available in the market place as excess of loss insurance; the bad news is that this does come with a price tag.
The Lord Chancellor did comment that he understood the consequences of his actions and of course Insurers pass these additional costs on to their policy holders. This simply means that society and of course business is paying to protect claimants, no matter how fair their cause, at a time of great uncertainty in the economy at large.
The insurance industry has been pressing the government for a review of how the discount rate is calculated and this will undergo consultation. It will be some time before any changes are made, if any, so there is no good news on the horizon in this respect for the next year to 18 months at least.
At Brownhill Insurance Group we are working to ensure that any increases to premiums are kept to a bare minimum by utilising risk management techniques.
We really would recommend that you speak to us at your earliest opportunity to talk through your options and what you feel if the best way forward to protect your business.