Automotive: Outlining the impact of a new personal injury discount rate for automotive businesses and their insurance premiums
As of the 20 March 2017 businesses needing motor or liability insurance to operate noticed a big increase to their insurance premiums. That’s because the Ministry of Justice has made changes to the ‘Ogden discount rate’– the framework for calculating compensation pay-outs for those with serious personal injuries who are facing long-term loss of earnings.
The discount rate is a percentage reduction that insurers apply to the lump-sum compensation amount to allow for the estimated return-on-investment on this sum.
Having been set at 2.5% in 2001 the rate has moved to minus 0.75%. Whilst at first glance this may appear a modest percentage movement, the impact on claim payments will be significant. What this change essentially means is that those suffering from serious injuries will receive significantly higher compensation payments than before.
As a result of the new rate, insurers have been required to make substantial increases to their current claims reserves. The Association of British Insurers estimates the total cost of this change to be as much as £7bn to insurers. Separately, the government has acknowledged that the projected £1bn impact on the NHS for higher compensation bills relating to medical negligence claims is “broadly in the right ball park”.
So how will this impact automotive businesses as policyholders? Put simply, an increase in claims reserves for motor and liability policies will inevitably lead to increased premiums. Whilst it’s too early to say for certain what the scale of increase will be, estimates range from 5% to 20% – and that’s for claim-free businesses alone.
There is still a lot of uncertainty around the full impact of this rate change, including how it will affect different policies. For example, if you have a combined motor trade policy covering material damage, employer and public liability, and road risk cover, could the premium be even higher? Many questions remain unanswered, and the government launched a six-week consultation on 30 March to further discuss the change. The best thing businesses can do for now is to proactively review their risk management strategies to ensure they do all they can to minimise claims frequency and severity – both of which have a direct impact on insurance premium a direct impact on insurance premiums.
Risk Management Strategy
- Review your insurance cover with the support of a reputable broker who can best advise as to how to mitigate any potential premium increases without compromising on important cover
- Don’t be tempted to cut corners to save money – reducing your policy cover may lower costs but could expose your business to claims that exceed your cover limits. A professional broker can discuss ways to help you control costs without exposing your balance sheet unnecessarily
- There are ways to lower premiums without increasing the risk – by increasing your voluntary excess you are sharing the risk with the insurer which will bring costs down
- If you have an open driving policy you could save money by restricting it to named drivers only
- Some motor traders have policies in place that will cover employees for social, domestic and pleasure use; consider restricting this to just managers or those who really need it
- Shop around to try and get the best deal – use an independent broker with multiple insurer relationships, or brief a couple of brokers to get you that coverage of the market
For further information on the Automotive practice, and how it could help you and your business, contact the Automotive Team on email@example.com or 0800 61 222 84.