So it finally happened. After being brandished “crazy” and causing uproar throughout the insurance industry, the Ministry of Justice finally got its act together and issued its proposals for an adjustment to the personal injury discount rate
, commonly known as the Ogden rate, this morning.
The proposed figure of 0-1% has been met with widespread approval from the industry as we reported earlier
– but what difference will it actually make to companies’ bottom lines? Tony Sault, UK general insurance leader for EY reached out to Insurance Business with his verdict.
“Earlier this year, EY estimated that the changes to the discount rate would cost the insurance industry an additional £3.5 billion and add 6.5% to customer premiums and we found these numbers were closely borne out in practice,” he said.
“We believe the new proposals, which the Government expects to imply a real rate of 0% to 1%, will have a significant impact on these costs. A revision to 0% could reduce these costs by one-third meaning reserve releases of £1.2 billion, while a change to 1% could reduce this by two thirds, meaning up to £2.5 billion could be saved by insurers and reinsurers compared to their current booked position.
“We would also expect the recent rise in premiums to level off in anticipation of the new legislation, and ultimately premiums could fall between 2% and 4%, saving up to £21 on the average premium to the consumer.”
Good news all around then with customers too standing to benefit – that is, of course, if insurers truly pass the savings on. Some have been quick to insist they will.
“We’re pleased that the Government is now taking action to address this issue,” commented Steve Treloar, managing director of general insurance at LV=
. “The new system will not only ensure fair payments for those making claims but it will also help reduce the cost of car insurance for drivers at a time when premiums are at record highs for hard pressed motorists, and LV=
commits to passing on 100% of the savings produced by this legislation.”
Stephen Hester, RSA
group chief executive, meanwhile, commented that the reform should help “stop the rot”.
“We welcome the proposed reforms, which much better reflect the realities of how claimants invest their compensation payments today, and provide a means to continue to review the situation over time,” he said. “If passed, the benefits will be felt by all our customers, helping to stop the rot of steep rises in premiums, which are having a disproportionate impact on costs for motorists, businesses and the NHS.”
However, Dr Matthew Connell, director of policy and public relations at the Chartered Insurance Institute issued a more cautious response. While welcoming the news, he highlighted that more needs to be done to reform the rate overall.
“Calculating the rate according to the way in which personal injury claims are invested in real life will produce a fairer outcome,” he said.
“In the longer term, we should look at a more radical reform of the personal injury system. The current, highly adversarial system creates unnecessary legal costs, increases distress for claimants and pushes up insurance premiums for consumers. A system that prioritises the immediate needs of people with personal injuries above the apportionment of blame would be less stressful for claimants, and could avoid many of the unnecessary costs that ultimately fall on consumers.”
Ogden rate proposal in: insurance industry reacts
Ogden rate announcement revealed