Why are insurance premiums increasing so much?
Simple – Decisions taken by the UK Government have had and will have a dramatic effect on your insurance premiums.
1.Insurance Premium tax
This has increased from 6% to 12% in the space of 18 months. Each 1% increase is worth about
£1 billion in additional tax revenue. We anticipate further increases over the next few years. This affects virtually all types of non - life insurance policies.
The Ministry of Justice has recently announced the discount rate used to calculate multipliers for future losses in serious personal injury claims is to be reduced from the current 2.5% to -.75%. Newspaper headlines have stated motor insurance premiums will need to rise by hundreds of pounds, particularly for young and older drivers, to ensure insurers have the funds to meet the increased payments which will result. Motor insurers are not alone in being affected, the increased payments will also relate to employers’ liability and public liability claims. The NHS will be hugely impacted in respect of the number of clinical negligence claims it faces from seriously injured patients.
What is this about and how will the change impact?
In serious injury cases, a claimant will claim for future losses which will be sustained due to their injuries, such as loss of earnings if they are unable to return to work or the cost of care and equipment to enable them to be properly supported for the rest of their lives. These losses are calculated on a multiplier and multiplicand basis, where the multiplier is the net amount of the loss per annum and the multiplier the number which reflects the estimated number of years the multiplicand should be paid for. The discount rate reflects the fact the claimant will receive the money for their future losses ‘up front’ and can invest this to protect them from future inflation.
The Ogden Tables are used to ascertain the appropriate multiplier for any claim. These tables provide figures for multipliers for persons of all ages, for term certain (e.g. loss of earnings to retirement date) losses or for whole life losses. Variants are provided for different discount rates, but since 2001 2.5% has been the rate, set by the then Lord Chancellor Lord Irvine of Lairg, to be used. Claimant’s lawyers have long argued, particularly since the reduced rates of interest on offer following the Financial Crisis, that claimants cannot achieve a return of 2.5% per annum on their investments. Claimants are not financial experts and cannot afford to put their funds into more risky investments paying higher rates, where they could lose substantial sums. Hence the announced reduction to a rate of -.75%, which is indicating the returns on safe investments are likely to yield less than inflation.
In practice what does this mean?
Using some very straight forward examples:-
1) A male aged 30 who will not be able to work again, has at the time of the claim an annual net income of £20,000. Using the Ogden Tables he would on a 2.5% discount rate get a multiplier for his loss of income to an expected retirement age of 65, of 22.84. This gives him a claim payment for loss of earnings of £20,000 x 22.84 = £456,800.
Now at the reduced discount rate of -.75% the multiplier will be 38.5, giving a payment of £775,000, an increase of £318,200.
2) A female aged 30 who now requires nursing care costing £100,000 per annum, would have at the 2.5% rate had a multiplier of 30.68 giving a payment of £3,068,000.
The new -.75% gives a multiplier of 77.34 making her payment £7,734,000, an increase of £4,666,000.
Settlements for serious claims of this type are more complex than these examples but they hopefully illustrate the increased payments insurers are now going to have to fund. This change will undoubtedly affect future premiums.
Hallsdale Insurance Brokers will do all it can to keep these inevitable increases to a minimum by actively exploring the market and engaging with Underwriters to ensure that you are getting the best cover at a competitive price.