Inflation and negative discount rate to drive UK casualty rates

UK casualty and commercial motor rates are likely to harden as claims costs rise at a frightening rate, according to insurer QBE.

The cost of large and catastrophic personal injury claims in the UK is increasing on the back of rising care costs and higher costs of living, said speakers on a QBE-hosted webinar.

In addition, an anticipated review of the discount rate, which is used to adjust personal injury compensation payouts, is likely to add further pressure to casualty claims costs in the UK.

There is “no good news” when it comes to large and catastrophe casualty claims in the UK, which are rising across the board, according to Andrew Hibbert, partner at Clyde & Co. During the past two years, the average hourly rate charged by agency carers has increased 33%, while the annual cost of a care package for a complex personal injury claim has risen from £450,000 to almost £600,000 in some cases, he explained.

The UK casualty sector is caught in a “perfect storm”, with the pending review of the discount rate, the impact of Brexit and rising cost of living, Hibbert warned.

Alistair Kinley, director of policy and government affairs at Clyde & Co, said the UK now has some of the highest personal injury costs in Europe.

“The cost of claims is the main driver, and when you combine that with the impact of a low (negative) discount rate, we are in a bad place. Twenty years ago, the cost of caring for a typical tetraplegic in England and Wales was fifth in the chart of European countries. Ten years ago we surged ahead in terms of cost. I am afraid now we are so far out in front, it’s terrifying. That has a knock-on effect on the cost of insurance and reinsurance,” he said.

The high cost of large and catastrophic personal injury claims in the UK could see reinsurers withdraw support for the market. “At times, people are questioning if there is appetite from some reinsurance providers to underwrite certain types of risk in this country. Motor being one of those areas where there is some debate. We are not in the best position,” said Kinley.

And faced with “sobering” claims inflation, insurers may have little choice than to increase prices, according to Jon Dye, QBE’s director of underwriting for motor in the UK. “Will we see a hardening of prices? I think to cover claims costs, undoubtably premiums will have to follow at some point. Whether that is in three months’ time, it’s not for me to comment on. But it will come undoubtably,” he said.

“Our objective is to provide sustainable pricing for our customers and our partners in the future. This is one of the biggest challenges for us as insurers,” Dye added.

“The business we are writing today, and the premiums we are charging today, have to cover claims that are settled years and years ahead, under different regimes and discount rates, as well as inflation and cost of care. Our actuarial teams will be looking to factor in and make sure we are adequately reserved and hold enough for potential claims in the future,” Dye said.

The pressure on claims and the prospect of a higher discount rate have not changed QBE’s appetite for casualty and commercial motor limit, but it may affect pricing going forward, according to Anna Bennett, the insurer’s director of casualty in London.

“There is no change in our appetite. We continue to make sure we are adequately reserved and are monitoring the situation. But we are there for the future. There is no change to the casualty portfolio from my perspective, we are just seeing larger loss. We just have to make sure we charge adequate premium for that and reserve for future losses. We are not seeing loses from one industry segment or one area, it’s across the piece,” she said.

The personal injury discount rate in England and Wales, due for a five-year review in 2024, is currently set at negative 0.25%.

The discount rate is set independently in England, Scotland and Northern Ireland at different times and on a slightly different basis. Last year, Northern Ireland set its discount rate at negative 1.5%, reflecting changes in inflation. “I cannot see the discount rate being any better [in England and Wales], when it is reset, than minus 1%, and I genuinely fear that it will be at the level we have in Northern Island of minus 1.5%, or possibly worse,” said Clyde & Co’s Hibbert.

The “rachet effect” of a negative discount rate is “chilling”, added Kinley. “We do now need to consider where the economy is steering the setting of statutory discount rates and it’s not in a positive direction for this sector at the moment,” he said.

In anticipation of a revised discount rate, which is likely to benefit personal injury victims, claimant solicitors are seeking to slow down and delay claims, Hibbert added.

“[Claimant solicitors] know the finish line is July 2024, and they are beginning to make more noise about the fact that might be a need to look at the rate sooner. The solution for us is to create pressure… and make strong and early offers,” he said.

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