Britain plans to alter the rate used to calculate upfront personal injury payments, the Ministry of Justice said on Thursday, a move which will reduce those payments and insurance premiums.
Motor insurers’ profits were dented and insurance premiums have risen after Britain unexpectedly cut the rate – known as the Ogden discount rate – in February to -0.75 percent from 2.5 percent. An outcry from insurers led to a government consultation on how the rate is calculated.
“Based on the evidence currently available, the government would expect that if a single rate were set today under the new approach, the real rate might fall within the range of 0 to 1 percent,” the ministry said in a statement.
Draft legislation to make the change will go before the UK parliament later on Thursday, it said.
The new rate would not be applied retrospectively, it added.
A lower rate requires insurers to make larger lump sum payments on personal injury claims, as it assumes lower annual investment returns for that lump sum. The rate is currently linked to the yield on index-linked gilts.
A subsequent government consultation has led to the plans to alter the calculation method for the rate.
Huw Evans, director general of the Association of British Insurers, said the new rate “would better reflect how claimants actually invest their compensation in reality.”
“If implemented, it will help relieve some of the cost pressures on motor and liability insurance in a way that can only benefit customers,” he said.
However, Brett Dixon, president of the Association of Personal Injury Lawyers, said the new rate “must be set to meet the needs of catastrophically injured people,” adding that lower insurance premiums were “of no benefit if (customers) are severely injured and forced to take risks with the compensation they so desperately need”. Shares in motor insurer Direct Line were up 2.9 percent at the top of the FTSE 100 index at 1007 GMT, while Admiral was down 0.2 percent. Aviva and RSA, which also have large motor insurance businesses, were up 0.4 percent and down 0.4 percent, respectively.
Analysts were awaiting more detail on the new rate.
“The key will be precisely how the discount rate is to be set in the future and the frequency with which it will be adjusted,” Eamonn Flanagan at Shore Capital said in a note.
(Editing by Rachel Armstrong and Jason Neely)
[Editor’s Note: The International Underwriting Association (IUA) issued a comment welcoming the proposed changes to the Ogden rate.
“The plans promise to establish a much fairer and more realistic assessment of investment strategies. In our response to the public consultation earlier this year, the IUA supported a move to break the link with index-linked government bonds,” said Dave Matcham, chief executive of the IUA.
“Assessing the rate against a wider range of investment products is a move that has widespread support. Its effect will be to create a more efficient insurance marketplace to the benefit of businesses and consumers across the UK,” he added.
The IUA is a trade association that represents the international and wholesale re/insurance companies operating in or through the London market.]
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