The insurance industry this week sent out conflicting messages about the likely impact of a reduction in the discount rate applied to personal injury compensation payments – but there are warnings that consumers will take the brunt of any fall in insurers' income.
National insurer Direct Line announced yesterday, 20 February, that it would defer publication of its financial results ahead of a likely statement from the Ministry of Justice this month.
The motor insurer has previously stated it could take a £131.9m hit if the rate is reduced to the anticipated 1.5%, but yesterday it said the company’s sensitivity to such a decrease is ‘materially lower’ than previously indicated. The company said its personal injury claims liabilities related to lump sum settlements have already been calculated using a discount rate of 1.5%, given the potential for a reduction.
The rate at which personal injury awards are deducted is currently set at 2.5%, to take account of how much interest the money will earn once it is invested. Insurers fought an unsuccessful battle earlier this year to block any immediate change, and there are warnings from the industry that consumers will take the brunt of any fall in income.
In contrast to Direct Line’s stance, insurance consultant Willis Towers Watson has warned the potential impact on insurers’ reserves is a ‘pressure cooker ready to blow’. The company has warned a revised discount rate of 1% - still higher than many claimant campaigners would wish for - would have a one-off impact of £1.7bn.
The ongoing annual cost would be approximately £200m for future business, implying an increase of between £5 and £20 per policy per year.
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 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.’
Speaking at an evidence session of the justice committee earlier this month, Association of British Insurers director James Dalton confirmed a reduction in the discount rate could cost the industry billions of pounds, with the costs passed onto consumers. This would likely mitigate the effects of reduced premiums pledged if the government goes ahead with proposed personal injury reforms.