Marsh: Discount rate cut could triple claims bills

The personal injury discount rate cut could increase the cost of large personal injury claims by between 1.5 times and three times, Marsh estimates.

As a result, the global broker has urged its clients to brace themselves for potential insurance rate rises at renewal time by managing risk proactively and having a detailed understanding of their claims profiles.

Lord Chancellor Liz Truss cut the discount rate to -0.75% from 2.5% on 20 March, which means insurers now face far bigger claims bills. They are expected to push up rates to compensate.

The discount rate determines how much claims pay-outs can be lowered to account for investment income the injured claimant can make by investing their pay-out. The negative discount rate means that not only are insurers no longer reducing payments to account for this income, they are paying out in addition to the amount awarded.

Brokers such as Marsh will have to help clients negotiate renewals in the face of potential rate ris es.

In an advisory note to clients, Marsh said: “Our calculations indicate the cost for [large personal injury] claims could increase by 1.5 to 3 times under the new regime.”

Marsh said it is still unclear whether insurers will call for big rate increases to compensate for the rise in large personal injury claims costs.

It said in the advisory note: “While [the discount rate cut] will inevitably increase the cost of some claims, our experience is that most insurance markets are reviewing their positon and it is too early to judge the impact on premiums.”

But even so, the broker urged clients to be prepared for renewal negotiations. The advisory note said: “At this stage, the level of potential rate increase and the impact on long-term agreements is uncertain.

“However, proactive management of your risk and a detailed understanding of your claims profile will put you in the best position when it comes to negotiating renewal.”

Marsh has advised clients to work with it to review outstanding claims and quantify the impact of the discount rate cut and discuss with the broker how they could reduce risk and improve claims defensibility.