To help you understand how this affects your business and how you can mitigate the financial implications, we have provided a brief summary of the changes.
What is the Discount Rate?
The discount rate is used to calculate the amount of compensation an injured party would receive to reflect the return they would otherwise earn when that money is invested. The aim is to make sure a severely injured person has the necessary financial security to provide for their care and loss of earnings.
Who does it affect?
Businesses most at risk are those with higher potential for large injury claims, such as Construction, Manufacturing and Distribution. The discount affects costs for all businesses which incur claims for bodily injury under policies including Private and Commercial Motor, Motor Trade, Employers Liability, Public Liability, Other Liability and Contractors Liability.
It will particularly affect large personal injury claims and compensation pay-outs.
Example: A thirty year old woman is disabled in an accident and cannot work again. The court determines she would have earned £20,000 a year until retirement at 65 and her medical care determined to be £100,000 a year. Under the current 2.5% discount rate the total sum award (consisting of Loss of Earnings and Cost of Care) would result in a lump sum award of £3,414,350. With the new discount rate of -0.75%, we estimate that this would increase to £8,480,400 - an increase of over £5m.
What happens next?
- Insurers are increasing all current open and future claims reserves.
- A further review is planned looking into an independent body setting future rates.
- Premiums may increase across the market as insurers try to recoup the cost of claims.
How you can limit your exposure
- Any actions which can be taken to reduce the likelihood of large losses will limit the impact of these changes.
- We recommend that whoever is responsible for your organisation's motor and liability insurance consider making risk management an internal part of their role, so that risks are identified and prevented as much as possible. This could also lead to a reduction in the insurance premium that your company pays as its risk profile is reduced.
- Ensure that all decisions are recorded, training is up to date, and all risk assessments are fit for purpose. Should an incident occur, there needs to be a thorough investigation to evaluate the evidence and to decide whether to accept liability or defend.
- Create effective accident policy documents and an accident management programme. Identify and train employees in investigative technique. In the event of an accident, record dimensions, weights, distance and light. Identify witnesses and take neutral statements.
- Review your liability limits with your broker to make sure you have adequate cover.
Howden act as a trusted advisor for our clients. We see it as our duty to keep you informed of any developments that may impact your business and provide clear and effective recommendations.
We will provide any further updates on the personal injury discount rate as it arises but in the meantime, please do not hesitate to contact us if you have any questions.