Discount rate: cost of claims could exceed coverage levels, members warned

Insurance buyers should ensure their level of liability coverage matches their exposure in light of the reduction in the Ogden rate, Airmic members have been advised.

Speaking in an Airmic webinar on the impact of the rate change, Alistair Kinley, director of policy and government affairs at BLM, warned members that the new discount rate of -0.75% will see the cost of some claims surge, potentially leaving businesses exposed to paying a significant excess in cover.

The Ministry of Justice announced in February that the rate - used to determine lump sum compensation to claimants who have suffered life-changing injuries - will fall from 2.5% to -0.75%. This was a much larger change than expected by the industry and has led to calls to reform the method used to determine the rate.

The webinar heard that due to the multiplier effect, some claims could even double - see box. "Some policies don't provide for that level of cover. A small business could go bankrupt if a policy is capped at £5m and the claim jumps to £8m," Kinley said. "The key takeaway for risk managers is to check your limits."

According to Luke Baker, casualty product director at RSA, insurance premiums are likely to rise as a result of the change, with motor policies seeing the biggest increases, and employers' liability and product liability also likely to be affected. He noted that there are still many uncertainties that will impact pricing, including to what extent the change will affect rates and capacity in the reinsurance sector.

The strength of the pushback from the industry has resulted in a government review of the way the Ogden rate is calculated. It is currently linked to the return on index-linked gilts, which have fallen sharply in recent years.

BLM's Kinley said the speed with which the consultation has taken place and the language from the consultation "strongly suggest the government felt uncomfortable with the decision so we could be looking at a new way of setting the rate."

However, he noted that the general election added an extra dimension of uncertainty and that there are "other strong lobbies against a change". Reform will require an Act of Parliament, which in practice would need to get through parliament by late-2018. "It could be done, but it's far from given," Kinley noted. 

Listen to the webinar in full.