New Personal Injury Rate Rules Will Cost UK Auto Insurers Billions

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Changes to personal injury claim payouts will cost UK auto insurers and reinsurers 3.5 billion pounds, according to consulting firm EY.

The figure does not include the ongoing costs this year and in the future when accidents are settled at the new rate.

Earlier in the year, a government review led to a cut in the discount rate used to calculate personal injury claims. The cut reduced the discount rate to –0.75% from 2.5%, a rate that had been in place since 2001. The move erased millions in profits of UK insurers.

The change in rules reduced the industry’s NCR (net combined ratio) from 100.5% in 2015 to 109% in 2015.

EY pointed out that while the discount rate change was announced in February 2017, insurers accounted for the impact on outstanding claims in their figures for 2016.

The reduction in the discount rate has forced insurers to pay out more to claimants now to make sure the returns over their lifetime are in line with the awarded compensation. Insurer profitability will take a hit under the rule changes.

Insurer Admiral (LON: ADM) took the biggest hit in 2016, with profits falling by 25%. Direct Line (LON: DLG) took a one-off earnings hit.

EY estimates that there will be further pressure on the ratio this year, as insurers will need to rebuild reserve margins to offset the costs of the new Ogden rate.

The consulting firm also notes that proposed changes to whiplash claims, which have high rates of fraudulence, could bring some relief to insurers.

If those reforms go through, EY estimates that NCR may increase to 100.2% next year.

The general election, according to EY, may have also heightened uncertainty.

“The general election result last week may have created additional uncertainty and insurers will be hoping that the Ogden consultation and reform of whiplash claims will remain priorities for the new Lord Chancellor and the government,” said Tony Sault of EY.

While changes to whiplash claims may provide relief to insurers, motorists may see their premiums increase. The Association of British Insurers says premium rates were already at a record high in the first quarter of the year.

EY says higher rates of reinsurance claims, an increase in the insurance premium tax and higher repair cost inflation could increase consumer rates by 9% in 2017.

Because insurance companies will be paying higher compensation for serious injuries, higher costs will be passed down to the consumer.

Sault estimates that motorists will see a 28-pound increase to their premiums on average for a comprehensive policy.

“The impact of the Ogden rate change, together with the increasing cost of repairing ever more complex cars, will inevitably filter through to premium rates,” Sault said.

Motorists will further feel the effects of the changes next year when reinsurance cover for larger claims is due for renewal.

Younger drivers, Sault says, will be hit the hardest, as they account for a major percentage of larger claims.

Sault called for a review of the proposed whiplash reforms and Ogden to protect consumers from rising premiums.

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