ABI warns of three-pronged increases
The change in the discount rate comes into force today.
It was announced by the government last month that the discount rate would be cut from 2.5% to -0.75%, a decision which angered many insurers who claimed it would lead to a steep rise in premiums.
Today the Association of British Insurers has said that the huge cost increases will lead to three waves of increases between now and the start of next year.
It expects the first wave of rises to take place imminently, with the second and third waves coming as reinsurance renewals are due in early July or at the beginning of 2018. Many insurers choose to reinsure against large risks, such as catastrophic personal injury claims, which means some of the impact of the recent change will so far have been absorbed by existing reinsurance contracts. But given the size of the discount rate cost impact, these companies will inevitably increase their premiums when that reinsurance is renewed, adding to insurer costs which will inevitably feed through to the premiums insurers have to charge customers.
Huw Evans, director general, ABI, said, ‘The massive rise in insurers’ claims costs, which makes premium rises for millions of customers inevitable, results from a wholly avoidable decision by the Lord Chancellor.
‘It was based on pressure from claimant lawyers, poor legal advice and an outdated formula that does not reflect the choices available today for a prudent claimant. With the public purse hit by £6bn, the government consultation cannot come soon enough. We must move urgently to a fair and modern formula for calculating compensation that works for claimants and insurance customers alike.’