If you work in the insurance profession, you would have been hard pressed to avoid the furore that ensued following the Government‘s decision to increase the discount rate from -2.5% to +0.75% in May of this year. If you are not involved in insurance, you may be blissfully unaware of what it really means to you, unless that is you have renewed a motor insurance, employers liability insurance or public liability insurance policy recently and have suffered an increase in price.
The discount rate is used to calculate a lump sum claim settlement for long-term care, rather than making payment on an ongoing basis. Previously, the settlement would be “discounted” to take into account the fact that the lump sum could be invested and thus create an additional source of income for the claimant. However, due to low rates for Gilts, the reverse is now true and a lump sum payment will be at a higher amount than periodic payments.
A further announcement by the new Lord Chancellor on 7th September 2017 has put forward a new mechanism for calculating the discount rate, which suggests that it is to be revised to between 0% and 1%. However, this needs the enactment of new legislation, so it will not be changing in the near future.
This therefore still leaves clients and insurers in an invidious position, as limits and claims estimates should still reflect the rate applicable at the point of settling claims and not when the incident occurred.
Whilst these changes in percentage terms don’t look very much, from a monetary perspective the change is massive and, for example, we’ve seen claims that were previously expected to settle at £7.6m increased to an amount of £19.3m. This will obviously have a huge cost to the insurance market which will need to be met by increased premiums.
Although pricing has been the main focus of publicity following the change, of much greater importance to policyholders should be ensuring that they arrange sufficient cover to meet their increased potential liabilities. The thought of an insurance policy having to respond to an injury claim in excess of £10m was previously unthinkable, but is now reality.
The assessment of sums insured of small to medium enterprise (SME) clients, usually centres around property sums insured and indeed, this was the case when we launched client information surrounding the assessment of property sums insured and our two fact sheets, one for property owners which can be found here, and the other for general commercial business which can be found here entitled DON’T GET CAUGHT OUT.
These fact sheets did make comment on the things that clients needed to consider in relation to the setting of liability limits of indemnity, but this has now become ever more important, particularly as the failure to correctly set a limit of indemnity can actually now bankrupt a small business.
The change to the discount rate and the implications it has came in almost overnight, and clients did not have the opportunity to assess their potentially increased exposures. Setting a suitable Limit of Indemnity is notoriously problematical, although the attached information issued by Zurich Insurance which can be found here in relation to public and products liability, and here in respect of employers liability should be of assistance.
In summary you should consider the following:-
Public & Products Liability
- Do any minimum requirements apply to your business that have been imposed upon you by customers?
- What your product or service, and the potential for it to cause injury or harm?
- What do you actually do, and are there any higher risk exposure such as providing safety critical products or exporting to the USA and Canada?
Employers Liability
- Is there a concentration of staff in a single place, which could lead to multiple claimants arising from a single incident?
- Do you undertake hazardous activities such as work at height?
- Do you undertake work in hazardous locations?
We hope this provides some useful guidance, which is expanded upon in more detail in the fact sheets. In addition, colleagues at Mason Owen Financial Services would be happy to assist and advise you further should this be of concern. Feel free to contact us by email on mail@mofs.co.uk or by telephone on 0151 255 2600.
