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Insurance premiums will rise after drastic cut to discount rate

Insurers anticipate that average car insurance premiums could rise by up to £75 a year as a result of a government ruling which was revealed this week.

The Ministry of Justice (MOJ) has announced a new formula for calculating the compensation payouts awarded to claimants who suffer long-term effects of their injuries. Insurers were expecting a reduction in the discount – known as the Ogden rate – which is applied if an insurance company makes a lump sum payment to a claimant. However, the reduction from 2.5 per cent to minus 0.75 per cent is considerably bigger than anticipated.  Some insurers said they had provided for a discount rate move to 1.5 or 1 per cent, with the most conservative rate move anticipated as 0.5 per cent.

Huw Edwards, director-general of the Association of British Insurers called the decision to make such a large change “crazy”.  He said: “claims costs will soar, making it inevitable that there will be an increase in motor and liability premiums for millions of drivers and businesses across the UK”.

The discount rate, which had not been amended since 2001, is based on gilt yields, or interest rates from government bonds. However, with the effect of inflation as well, the MOJ said that the real return is negative.

Experts have advised that the hardest hit will be those with larger insurance premiums, so a driver under the age of 22 may have to pay up to an additional £1,000 per year. The beneficiaries of this change will be accident victims as they will receive higher payouts.

The MOJ said that it had no choice but to reduce the discount rate according to the existing law and they will now launch a consultation on how the system can be made fairer.

Limited payments for whiplash claims announced

The Prisons and Courts Bill has been published today and it contains new fixed tariffs for personal injury claims.

The government had originally planned to increase the payment limit to £5,000 across the board.  However, the bill sees a change to this plan with a small claims limit of £5,000 for whiplash injury, but a lower threshold of £2,000 for other personal injury claims.  The bill also includes a ban on settlement of such claims without medical evidence.

This bill follows a government consultation which ended on 6 January.  Justice Secretary Elizabeth Truss announced the legislation and said that the measures introduced will cut car insurance premiums by around £40 per year.  The government is “helping to crack down on the compensation culture epidemic”.

Lawyers will be excluded from low value claims and successful claimants up to the thresholds announced will not be able to recoup legal expenses.

James Dalton, ABI director of general insurance policy, said “The reforms to whiplash claims set out in the bill cannot come soon enough, for far too long claimant lawyers have been defending a system riddled with exaggerated and fraudulent claims because they have been profiting handsomely from it.  The gravy train must stop”.  He continued “People want an insurance claims system that provides compensation and support to those who genuinely need it.  What they don’t want is to be plagued by spam calls and texts from ambulance chasers, whilst personal injury lawyers continue to profit from a broken system in urgent need or reform”.

The lobby group Access to Justice criticised the bill.  They believe that the small claims limit “discriminates against ordinary people suffering whiplash injuries and will open the doors for claims management companies and cold callers to wreak further havoc on our market”

Insurtech: via technology partnership or mergers and acquisitions?

Insurtech dominated media headlines in 2016 and became a recurring theme in research reports. This year we can expect more of the same as digital technology continues to reshape traditional practices and attract startups and challenger brands.

According to survey results released in January by Willis Towers Watson and Mergermarket*, insurers believe the immediate priority is to digitise their businesses as quickly as possible. Almost three-quarters (74 per cent) say they lag well behind fintech leaders and must catch up.  

Fergal O'Shea, EMEA life insurance M&A leader at Willis Towers Watson, said: "Insurers recognise the importance of building a sustainable digital infrastructure to improve customer engagement and as an essential distribution channel, which is likely to be addressed through internally driven innovation, joint ventures and M&A activity. For those that hesitate, there remains the commercial risk that they will get left behind and fail to capture future generations and younger policyholders who are more likely to engage via digital distribution.”

Almost half the survey respondents (49 per cent) expected to make an acquisition to acquire digital technologies in the next three years, and nearly all respondents (94 per cent) thought distribution is where digital technologies will make the greatest impact in the next five years.

More than three quarters (77 per cent) said web and mobile will be a key focus for the next two years, with big data, automation, robo-advice and sensors also identified as being significant in the next five years. Insurers also recognised the huge role that digital technology can play in increasing operational efficiency and enhancing customer experience.

Analytics is another growth area highlighted by the survey. Nine out of 10 respondents said they have investigated ways to gather more information from their customers and 79 per cent use social network data.

Even though technology startups can now steal market share, the survey revealed that insurers believe they will prevent this by adopting new technologies themselves and by adapting to a changing marketplace. Just 8 per cent saw new entrants from the technology sector as a major threat to their business. 

If insurers are to bridge the technology gap, they need to work closely with specialists such as RDT. A technology partnership is another way of describing the joint ventures mentioned by Fergal O’Shea, and it can be a quicker and more effective route than mergers and acquisition or internal innovation.

As a technology partner and industry expert, RDT enables insurers to implement digital products and services across all parts of the insurance chain. Distribution, underwriting, claims and settlement are supported by versatile cloud-based technologies that create a powerful new platform.

In this sense, joining forces with RDT is a soft merger – a blend of two insurance businesses and the creation of a new infrastructure, but without the administrative or operational hurdles associated with a conventional merger or acquisition.

* Willis Towers Watson and Mergermarket surveyed 200 senior-level insurance executives in 2016. The aim was to map the changing attitude of insurers to digital technologies and to examine the extent to which companies are using M&A strategies to realise their ambitions.