On Monday 6th March 2017, the Ogden discount rate was reduced from 2.5% to -0.75%, which is one of the most significant changes facing our industry in some time and will affect the financial settlements given to people seriously injured at the fault of others.
It has had an immediate impact on some of our major Insurer’s results with Aviva, Admiral, Ageas and QBE all reporting significant effects on the Operating Ratio’s and Profits. Admiral are reporting a 25% downturn in the their reported profit as a result.
Paterson Insurance Brokers are part of the Gauntlet Group and as Motor fleet insurance specialist and risk managers we are urging fleet managers to act quickly and be prepared for a potential increase when their insurance renewal comes around.
Large claims settlements comprise two components – a lump sum paid by the insurer, lower than the total agreed compensation, and interest the claimant can earn by investing the lump sum.
Together, these are supposed to deliver the agreed settlement sum, which typically runs into thousands of pounds, in such cases.
Since 2001, the calculations have been based on the assumption that the injured party can access an interest rate of 2.5% for their lump sum investment.
However, given the sustained period of low interest rates, the Chancellor has moved the discount rate to -0.75%, as from March 20, 2017.
This interest rate now applies to both new and existing settlements, so insurers are having to use a significant part of their profits to ensure claimants who have had a settlement in the past, as well as new claimants, can receive the settlement sum agreed.
For every £1,000 in the settlement, £25 was formerly supposed to have been delivered by the 2.5% interest accrued each year, which meant that the insurer only paid £975.61 per £1,000.
With the new rate, they are now having to pay £1,007.56 per £1,000 in the settlement. This adds up to millions of pounds to find.
With their own reinsurance premiums suddenly rocketing in response, the reaction of insurers has been to immediately increase their rates on certain risks.
Our message is to talk to us as specialists in Fleet Risk Management and take steps to improve the management of your Fleet. We have online training software for drivers and specialist in-house Risk Managers who can give clients advice on improving your risk and mitigating against potential market rate hikes.
“Burying heads in the sand until the renewal comes around will be of no use. The message has to be to act swiftly and start to manage risk now.”