On 27th February 2017, Lord Chancellor Elizabeth Truss announced a new discount rate of -0.75% for personal injury awards, a drastic change from the current 2.5% (adopted in 2001). This change applies to all claims settled on or after 20 March 2017 regardless of when the loss occurred. It will therefore have a significant impact on the cost of future settled claims. This will be reflected in future liability and motor premiums.
How does the change work in practice?
A simplified example of a claim may help to bring the key issue into focus:
Claim Example: Public Liability, reserve increased from £4.6m to £9.6m Cause of loss Claimant fell from a window from the first floor of a house. Injury Severe head injury and unable to cope with many day-to-day tasks and vulnerable. Comment Increased by £5m due to discount rate change.
John is aged 30 and at the time of his accident was earning £35,000 a year. The annual cost of his care is £60,000. The Ogden rate enables actuaries to work out a multiplier for these annual costs that will determine the final lump sum settlement.
At 2.5%, the multiplier for a 30-year old for lifelong care is 29.60. 29.60 x £60,000 = £1,776,000. The multiplier for loss of earnings to age 65 is 22.84. 22.84 x £35,000 = £799,400. Thus, the total lump sum payable is £2,575,400.
At –0.75%, the multiplier for a 30-year old for lifelong care is 71.43. 71.43 x £60,000 = £4,285,800. The multiplier for loss of earnings to age 65 is 38.71. 38.71 x £35,000 = £1,354,850. Thus, the total lump sum payable is £5,640,650.
In this example the consequence of reducing the Ogden rate from 2.5% to –0.75% is to more than double the size of the lump sum.
The Impact on my Business
It only takes a single injury claim from an Employee or member of the Public, who requires ongoing care, for a £5,000,000 or £10,000,000 limit of cover to be exceeded.
Whilst the Government sets the minimum limits required for Compulsory Employers’ Liability cover, they will not step in to meet any shortfall should the limit be inadequate.
The statutory minimum requirement for Employers’ Liability cover is £5,000,000 although the industry normal is £10,000,000
There is no statutory requirement for a business to have Public Liability insurance, but this is just as crucial.
Should the cover limits be exceeded, you and your business would be expected to fund the difference!
The change in the discount rate could result in future settled injury claims exceeding the current limit of indemnity being purchased and potentially leave you and your business exposed to uninsured losses.
The rise in claims costs over the past 20 years has been significant and your limits of liability can no longer be ignored.
An immediate recommendation would be for you to review you current limits of indemnity ensure that you are adequately protected.
Claim Example: Employers Liability, reserve from £5.3m to £10.6m Cause of loss Fall from height of 8m. Injury Severe brain injury, claimant remains in hospital following accident over 12 months ago and still unable to speak. Comment Reserve increased by £5.3m due to change in the discount rate, future cost of care making up a significant percentage of the increase.
We are here to guide and assist you to arrive at an insurance programme that suits you.
For more information or to discuss your insurance requirements please please call 0333 400 0700 or contact us.