General Insurance Article - Three waves of impact forecast with discount rate change


Legislation that will confirm the Lord Chancellor’s decision to massively increase compensation payments for some injuries comes into force today, 20 March, as the first wave of impacts on insurance costs are already being felt.

 A number of insurers have already publicly confirmed that premiums are going up as a result of the decision in February to cut the discount rate from 2.5% to -0.75%. The ABI is today warning that, with such huge cost increases, these initial premium rises are likely to be part of three waves of increases that will take place between now and the beginning of next year, unless the Government follows through on its promises to examine whether to change the rules.

 The second and third waves will likely come 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.

 Most reinsurance renewals will take place in January 2018, meaning the third wave of increases could well be the largest if a new rate has not been set by then.

 Huw Evans, Director General, Association of British Insurers, said: “The massiverise 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 It was based on pressure from claimant lawyers, poor legal advice and an outdated formula that does not reflect the choices available today for a prudent claimant.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 £6 billion, 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.”

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