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How the new discount rate may change your insurance

Changes to the Discount Rate - Tuesday, Jun 13, 2017

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How the new discount rate may change your insurance

Changes to the Discount Rate and how it will affect your insurance

 

Part of our duty as your insurance broker is to keep you up to date with changes in the industry which may have an impact on you and your insurance policies.

On 27th February 2017 the Lord Chancellor announced a surprisingly large cut in the discount rate from +2.5% to -0.75%, and this came into effect on 20th March.

 

How serious is this?

Whilst a reduction in the rate was expected, it was thought the rate might go down to 1.25% to 1.5%.  This massive change caught the industry by surprise, and immediate reaction in the City saw insurance shares fall by 7%! 

The Association of British Insurers called it a crazy decision which will cost the industry, and ultimately the paying public, many millions in extra premiums.

 

What is the Discount rate?

Also referred to as the ‘Ogden Rate’,  the rate is used to calculate the amount of lump sum compensation that is paid to seriously injured individuals in the event of a claim, based on their age and average life expectancy.

Claim settlements for injury are a made up of a number of components.

  • Compensation for pain and suffering
  • Future loss of earnings
  • Future cost of care
  • Legal fees

 

The types of Insurance it affects.

This will mainly affect motor, employers, public and products liability insurance, and to a lesser extent other insurances that have a liability insurance section included, such as business packages, shops, offices, household etc.

 

What will it mean to you?

Premiums will rise, as insurers are already having to increase their reserves for existing outstanding claims, and with an expected uplift averaging 60% costs could go up by as much as 30%.  The industry will probably need to add somewhere in the region of £6bn to their reserves this year and an extra £900m a year thereafter.   The change in the discount rate also means that future claims could exceed your current policy limit and potentially leave you exposed to uninsured losses.

Here are some claim examples showing the effect of the rate change

Claim Settlement at +2.5% Settlement at -0.75%

18 year old male injured in a motor accident with spinal cord injury

£7.6m £19.3m

A cyclist hits a pot hole causing traumatic brain injury

£6.8m £10.7m

14 year old male suffers errors in the operating theatre and is rendered a paraplegic

£8.4m £17.5m

Accident at work led to a lower leg amputation

£1.1m £2.07m

15 year old female injured on a fairground ride

£8.5m £23.5m

 

Frequently asked questions.

Does this mean my insurance premium will increase?

This can’t be avoided, so yes it will more than likely increase. The precise impact will vary but in principle the more severe the injury, the longer the period that earnings are lost and care is required, the greater this increase will impact on the settlement amount. This means premiums across the board will be affected.

How much will my insurance premium go up by?

This will differ depending on individual circumstances, and the type of policy. Motor rates are already rising and industry sources are predicting an average rise of 30%. Pure liability rates will also probably rise at around the same level, but commercial package policies and home cover will probably only go up by 5% reflecting the smaller liability premiums within the overall cost of these policies.

I have never made a claim, so does this mean I won’t be affected?

No. Insurance involves the spreading of risk and losses of the few are shared by the many, and as the cost of settling claims rises, everyone’s premium will go up.

What should I do now?

We will ensure at renewal we advise you correctly and will discuss your limits of indemnity and make recommendations if we feel you need to purchase extra cover.

 

However if you would like us to look at your current policies now then simply call us on 01494 450 450 or send us an email to info@jbennett.co.uk and we will set up a review meeting.

 

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