Discount revision could cost billions
Changes to the Ogden discount rate could cost motor insurers and reinsurers £4.9 billion according to analysis from Willis Towers Watson.
The global advisory, broking and solutions company also warned that there would be a roughly £700 million per annum increase in the cost of providing motor insurance in the future.
Willis Towers Watson expects UK motorists will be required to fund the cost of this change to the tune of between £20 and £55 per policy per year depending on the speed at which the motor insurance industry looks to re-establish its balance sheet strength.
Stephen Jones, a director at Willis Towers Watson, said, ‘As a result, it appears unlikely that motor insurance is going to get cheaper anytime soon with rates up around 14% last year and perhaps a further increase of between 13% and 19% during 2017 if the response by insurers to such an outcome were to be added to underlying inflationary effects.’
Andy Staudt, a director at Willis Towers Watson, said, ‘Instead of being reviewed and updated on a regular basis to ensure compensation remains fair reflecting prevailing economic conditions, the Ogden rate has been left unchanged for 16 years. As a consequence, pressure has been building and appears to have reached a politically unsustainable level. The immediate impact of trying to defuse this pressure now will be painful in the short term as reserves for past claims that have yet been paid would have to rise, while the costs of future claims would also go up.’
When calculating the size of compensation awards, the courts have to make an assumption about how much interest the money will earn when it is invested. This assumption is known as the discount rate – the higher the rate, the lower the initial lump sum required. The discount rate has been set at 2.5% since 2001, but interest rates have fallen sharply since then. The current proposal is alter the rate from its current 2.5% to -0.5%.
A government decision is expected on the changes in the coming weeks.