According to analysis by Willis Towers Watson will cost the insurance industry, in particular the reinsurers of this market, a material one-off reserve charge of approximately £5.8 billion. In addition, there would be a roughly £850 million per annum increase in the cost of providing motor insurance in the future.
Stephen Jones, a Director at Willis Towers Watson, said: “The immediate impact of such an aggressive cut is going to be painful for both drivers and insurers. Reserves for past claims that have not yet been paid will have to rise, while the costs of future claims will also go up.”
Willis Towers Watson expects UK motorists will be required to fund the cost of this change to the tune of between £25 and £65 per policy per year depending on the speed at which the motor insurance industry looks to re-establish its balance sheet strength.
“Looking beyond today’s decision, we would strongly recommend that the Ogden rate, which until now had been left unchanged for 16 years, should be either regularly reviewed and revised or pegged to an independent economic indicator so that we do not find ourselves in a similarly difficult position in the future,” said Stephen Jones.
In addition, Grange Turner of Willis Re commented: "The decision will come as a surprise to many because it is outside of the range of most modelled scenarios, and there are obviously implications for the purchasing of reinsurance.
For a start, we are likely to see an increase in interest for retrospective solutions that protect insurers’ balance sheets in cases where these have been weakened by the need to increase reserves.
"In terms of excess of loss, the position is not yet clear. Obviously the cost of lump sum awards is likely to increase, but we expect reinsurers to balance this with the fact that original premiums will also increase to compensate, and the number of claims settling as PPOs is likely to fall."
Mike Brockman, CEO of telematics insurance pioneer, Insure The Box said: “The Lord Chancellor’s announcement is reckless, naïve and has no concern for the well-being of motorists and indeed claimants. To change the discount rate to such an extent all in one go, after such a long period of stability, and regardless of changing financial markets, shows that the Government’s processes are flawed.
“Once again, the youngest drivers - who have relatively more large claims and higher premiums – will be hit hardest by this change. We estimate the Government’s action could easily increase rates by 15% or more. This seems in stark contrast to the Prime Minister’s often-quoted goal of helping those who are just trying to work and earn for their families.
“This dramatic increase in the cost of claims is in addition to recent hikes in insurance tax. In less than two years, IPT will have doubled from 6% to 12%, disproportionately affecting younger drivers. And this latest change means insurance premiums will probably rise, which could see many young motorists priced out of driving altogether. Even worse - they could consider taking the risk of driving whilst uninsured.
“While telematics insurance can work to reduce motoring premiums using smart technology, these blunt Governmental changes work to push costs up for all. Along with other insurance businesses and industry bodies, we urge the Lord Chancellor to stop and think about the real consequences of this decision.”
Michael Lloyd, the AA’s director of insurance says: “This is an astonishing decision by the Ministry of Justice that ignores the impact it will have on drivers and businesses, who will ultimately foot the bill through higher premiums.
“It comes on top of recent increases in Insurance Premium Tax, which we fear may be increased again by the Chancellor during the budget, piling yet more misery on families.
“It also makes a nonsense of the whiplash injury reforms proposed by the Justice Ministry which, they say, should help to cut premiums. This move, at a stroke, has wiped out any potential benefit of those reforms.
“Many insurers have already reserved for a potential discount rate cut which has been expected for some time. But this cut is far deeper than anyone expected although of course, it will be of comfort to those who have suffered a serious injury.”
Lloyd adds that the extent to which premiums will be affected remains to be seen. “However premium increases are bound to be significant and will particularly be so for young drivers, who already pay the highest premiums and are most likely to be seriously injured in car crashes.
“My fear is that this will simply encourage young drivers to take dangerous and illegal steps such as trying to get a parent to illegally ‘front’ their insurance or even attempt to drive without cover.
“Both will inevitably result in greater costs and yet greater upward pressure on premiums.”
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