The British Insurance Brokers’ Association (BIBA) has welcomed the Lord Chancellor’s proposed changes to the law used to set the discount rate, in response to May’s Ministry of Justice’s (MOJ) Damages Discount Rate consultation, and has called for their speedy implementation.
BIBA Executive Director, Graeme Trudgill, said; “BIBA’s response to the MOJ expressed our members belief that it is unlikely that many individuals would seek, or be advised to seek to invest all of their lump sum payments in index-linked gilts. It is very unlikely that a prudent investor with appropriate advice would receive a negative return.”
The Lord Chancellor’s proposed reforms include changing the way the Discount rate is set ‘by reference to “low risk” rather than “very low risk” investments as at present, which could better reflect the actual investment habits of claimants.
Trudgill said the proposal echoes BIBA’s position that the process should reflect the way compensation is actually invested, as well as BIBA’s recommendation that an independent expert panel advise in the Discount rate process.
“BIBA now calls for a speedy time frame for implementation of these proposals to end the uncertainty for customers brought about by the significant under insurance risk and increase to premiums that February’s discount rate change caused.
“The insurance industry was united in its approach to Government, and in its desire to achieve a fair balance of compensation for injured parties as well as reversing the unintended consequences of the change,” Trudgill said.
In February, Liz Truss, the Lord Chancellor and Justice Secretary, announced a steeper than expected cut to the Ogden discount rate from 2.5% to -0.75%, in a move that caused some insurers and reinsurers to see profit margins shrink, and reserve levels raised.
“The law is absolutely clear – as Lord Chancellor, I must make sure the right rate is set to compensate claimants. I am clear that this is the only legally acceptable rate I can set,” said Truss.
As a result of the Ogden rate change, the annual cost of providing motor insurance increased considerably, causing motor premiums for UK re/insurers to rise at a faster rate than ever before, up by 11% from this time last year according to the Association of British Insurers’ (ABI) Motor Premium Tracker.
Approximately £2.4 billion of losses have been publicly disclosed by re/insurers, following the controversial rate change.