Shockwaves are reverberating through the insurance sector since the Treasury announced the first change since 2001 in what is known as the ‘Discount Rate’ or ‘Ogden Rate’ – a calculation used in large personal injury claims settlements where the injured party is severely incapacitated and unable to enjoy their former quality of life.
Large 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 phenomenally low interest rates the economy has seen, 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 £1000 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 £1000. With the new rate, they are now having to pay £1007.56 per £1000 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 hike premiums. Gauntlet Group says that its early conversations with insurers suggest that this could be as much as a 25% increase in premiums at renewal time.
However, rather than viewing this as a disaster, Gauntlet is using it as a catalyst through which to encourage its motor fleet clients to engage in a holistic programme of risk management. It is already working with businesses who recognise that, to afford the massive increase in insurance costs, they need to lower their risk, minimise claims and make their motor fleets or businesses safer. In so doing, they can save substantial sums that will offset the general increase in premiums caused by market forces.
Gauntlet Group director, Ian McCarron, says: “Bus and coach operators need to pro-actively tackle this issue, by talking to us and allowing us to create a risk management strategy for them. 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.”
Gauntlet will be sending its account managers out around the country to meet with concerned operators face-to face and review their business operations, to assess where risk can be better managed, using some cutting-edge tools that it has at its disposal, as well as its two decades of experience as a risk manager.
Any business wishing to talk to Gauntlet can call 0113 244 8686. More information is at www.busandcoachinsurance.com