An announcement was made on the February 27th 2017 by the Lord Chancellor, which is expected to have far reaching consequences for the insurance industry “ and of course for those buying insurance. Notwithstanding mandatory or legally required insurances, most of us buy insurance to ensure that we are fully protected in the event of a claim. The change that we are discussing, directly relates to the settlement of claims “ and in particular to those that are seriously injured as the result of an insured loss.
The decision made will radically alter the way that lump sum payments, to those suffering serious injuries, will be calculated. This has shaken the insurance industry as it is anticipated to impact significantly on insurers’ profits. Put very simply, Insurers use the ‘Ogden Discount Rate’ to help calculate the level of financial award made in respect of people having incurred serious injuries, where the injured person will require long term care or suffer loss of earnings that could run to 30 or 40 years into the future. The Ogden Rate had not been reviewed since 2001 and it was widely felt that this left claimants at a disadvantage. The change will apply to all claims settled on or after March 20th 2017, regardless of when the claim happened or was notified.
The type of injury cases affected will include motor accidents, Employers & Public Liability claims and Property Owners & Landlords where liability cover is included. Essentially, this change will affect virtually all major classes of Insurance business.
Claim settlements in respect of injury consist of the following key elements:
- Damages in respect of injury, pain & suffering
- Future loss of income/earnings
- Future cost of care
- ‘Other’ financial support “ for instance in respect of activity the insured can no longer perform due to their injury or the provision of additional support e.g. prosthetics
- Legal & professional fees
When future loss of earnings is being assessed by the courts, they will consider how much the claimant will lose each year, as well as their age and life expectancy. A similar process is followed when considering the future care costs.
The rate change is going to impact directly on the costs of claims for all insurance companies, meaning that they will have to look carefully at their premiums, to ensure that premiums now reflect the significantly increased cost of claims that they will pay in the future.
For consumers the likely increased cost to them will depend on a number of factors including:
- The type of work or activity carried out
- Claims frequency and history
- Likely exposure to serious or catastrophic injury losses
Large or very complicated injuries or losses are more difficult to forecast than small to medium or straight forward ones. Prior history cannot always be relied on to indicate the likelihood of a major claim happening in the future. Unforeseen losses or accidents can happen in any sector, even those that are general perceived as ‘low risk’.
Liability and Motor Insurance policies intrinsically carry an exposure to claims involving serious injury & as such premiums must reflect the potential large losses that may occur in the future. There are a few factors that could impact on underwriters’ view of exposure:
- Business activities
- Risk management culture
- Prior Claims history and culture
- Perceived risk of serious claims for injury
As is the nature of insurance, if there is going to be a market-wide impact (there is), this must be absorbed by all consumers of insurance.
Claire Russell, Perry Appleton Risk Services.
Perry Appleton is behind the development and administration of UKWA’s bespoke insurance solutions; available exclusively for members and specially designed for the logistics and warehousing industry.