Rate cuts to follow £150m saving in UK personal injury awards

An increase in the discount rate applied by courts in England and Wales in personal injury claims will save insurers about £150m per year while savings to the NHS are calculated to total £200m, according to the UK government’s analysis, published after it announced earlier this week that the rate would be revised from -0.25% to +0.5% from 11 January 2025. The change from a negative rate, in place for the past five years, to positive territory effectively reduces the size of lump sum settlements in personal injury claims, which include victims of road traffic accidents as well as public and employer liability claims, with the view that returns on investing the money will make up the full compensation amount awarded by the court. The government said insurance companies are expected to pass on the savings from a higher discount rate to policyholders in the form of lower premiums, which is supported by market experts. Fitch said the change in the rate will have a positive impact on insurers’ bottom lines almost immediately. The new rate “will benefit the 2024 reported combined ratios as a result of one-off reserve releases, even though it does not come into force until 11 January 2025,” the rating agency said. Rival Moody’s said the increase in the rate will be “credit positive for insurers writing bodily injury-exposed business such as motor third-party liability because their future lump sum payments will be lower than initially expected”. This will allow insurers with exposure to bodily injury claims to release some of their reserves set aside for future claims, based on the old rate of -0.25%, which will result in a “modest but positive” one-off impact on underwriting profitability and solvency. Companies with the highest proportion of third-party motor liability business will benefit the most from the higher discount rate, Moody’s said, naming Direct Line, Admiral, Sompo’s Hastings, eSure and Sabre, while general liability will also see some upside. “The reduction in claims costs may accelerate price reductions in the UK motor market,” Moody’s said, although the market remains very competitive despite cautious underwriting and reduced capacity following an inflation spikes. The discount rate is in place to ensure courts set damages in personal injury at “no more, no less” than full compensation given potential returns on investing lump sum awards. Setting out the reasons for the new rate, Lord Chancellor Shabana Mahmood said the discount rate has to strike the right balance to avoid significant under-compensation and minimise excessive over-compensation. She said the personal injury discount rate “will always be a relatively blunt instrument” that cannot ensure every claimant receives exactly their full compensation. But she said the mitigation of significant under-compensation should be prioritised. While the expert panel advised a range of between +0.5% and +1%, Mahmood said the likelihood of under-compensation for rates above 0.5% to be too high. However, at a rate of +0.5%, the expert panel said claimants have at least a 55% chance of receiving full compensation or more, and will have no more than a 25% chance of under-compensation. Two core claimant groups modelled have a least a 40% chance of over-compensation using the +0.5% discount rate, but Mahmood said it is an “acceptable and necessary trade-off given the risks of under-compensation at a higher rate”. While this is the fourth review of the rate by a Lord Chancellor, it is only the second under the new framework introduced by the Civil Liability Act 2018 and the first to use an expert panel to provide independent advice and options. “The objective of such payments is to put claimants back into the same position as they were before the accident, as far as possible with monetary compensation, and the purpose of the rate is to adjust the value of these payments to better ensure this outcome,” she said. Mahmood gave further detail on the decision to continue with a single discount rate, rather than pursue the option of a dual rate system for short- and long-term investments. The expert panel did not recommend a dual rate, citing additional complexity and expense, which was echoed by HM Treasury and in consultations ahead of the review. While much has been said about the new rate for England and Wales mirroring recent changes in Scotland and Ireland, the Lord Chancellor’s response did not cite equivalence as a reason. However, it is widely thought to be a benefit for risk and insurance managers. The rate was due to be reviewed under law by 11 January 2025, and having started the process in July, the new Labour government was credited for announcing the new rate well within the deadline. Dave Matcham, chief executive of the IUA representing the London company market, said: “Early confirmation of the change is welcome. Companies will now be in a better position to plan for the forthcoming end-of-year renewal season.” He added that its members covering personal injury losses need stability in the rate for reserving against the liabilities of claims incurred and pricing for future business. Back in 2017, the rate suddenly changed from +2.5% to -0.75% under then Lord Chancellor Liz Truss, which saw insurers boost their reserves to cover the increased cost of claims. “Setting the discount rate at an appropriate level is vital to avoid driving up the cost of insurance for policyholders across the market. The IUA has always supported a rate that fairly reflects the ‘100% compensation principle’, which states that claimants should neither be overcompensated nor undercompensated,” Matcham said. Airmic members backed a rate of +0.5% in an October poll, with 67% of UK risk managers supportive of matching the rates in Scotland and Northern Ireland. The UK risk management association said applying a positive discount rate across the UK would mean personal injury claimants will receive less compensation, which could trigger a fall in the cost of liability insurance premiums. PwC said it expects motor insurance premiums to fall by about 5% in England and Wales as a direct result of the new personal injury discount rate, estimating an average saving of £50 per policy. Mohammad Khan, head of general insurance at PwC UK, said: “The increase of the personal injury discount rate by 0.75% to 0.5% in England and Wales… should bring some consistency to aspects of how motor insurance premiums and payouts are calculated across the UK.” “This change is good news for drivers as it will further intensify the competitiveness of the motor insurance market. Motor insurance premiums have risen by over 20% over the last two years but the direction of travel has been turning and these amounts are starting to reduce,” he added. QBE Insurance welcomed the rate change given the rising cost of liability claims. Jon Dye, director of underwriting of motor at the insurer, said the rate is more in line with today’s economic conditions. “While this rate is still likely to result in some claimants being over compensated, this movement is positive news for consumers and business, and will help negate the continued upward pressure on the cost of serious bodily injury claims, including increasing care cost at c+9-12%,” he added. Jonathan Edwards, partner and head of insurance and risk at law firm HCR Law, agreed: “The new personal injury discount rate is very good news for insurers, as it will hopefully begin to mitigate significant claims inflation over recent years, fuelled by the ever-increasing cost of living, potentially freeing up funds for insurers to utilise elsewhere… Insurers will be reviewing outstanding settlement offers and reserves in advance of the new rate coming into force on 11 January 2025.”

Rate cuts to follow £150m saving in UK personal injury awards

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