T he past year or so in the insurance industry has seen some major changes coming into effect which have hit the premiums of both individuals and businesses who take out insurance policies. Why have premiums gone up? Since June of this year, the Insurance Premium Tax (IPT) has gone up to 12%. IPT was first introduced in 1994 at 2.5%, and has steadily increased since then. The last rise was 0.5% in 2016 which took the rate to 10%, but from 1 June 2017, most buyers of insurance policies will have the latest 12% rate added to their premium. Announcing the extra 2% increase, Chancellor, Philip Hammond, said IPT rates in the UK remained some of the lowest in Europe, but the Association of British Insurers (ABI) described the increase as a “hammer blow for the hard-pressed”.
John’s future financial requirements are calculated by applying a formula to the present day calculation of John’s financial needs (eg loss earnings net of tax and the cost of nursing care etc) with the aim of producing an accurate lump sum. The multiplier also takes into account mortality risks and most importantly, that John will receive the lump sum up front and that it will be invested and will earn interest. Using the old Ogden Discount Rate, the total nursing care element of John’s claim and loss of earnings totals his claim at £2,791,000 . Under the new 2017 rate, John’s settlement value is £6,325,000 – increasing the amount his insurer will need to pay by over £3.5m or 127% . As you can see from John’s example, the change in the Ogden Discount Rate from its current +2.5% to -0.75% results in a significant increase in the total settlement of a claim.
How will all this affect my insurance premium? According to the comparison website moneysavingexpert.com, the average car insurance policy now costs 11% more than 2016 and £200 more than 2015. It is therefore imperative drivers ask for advice from a broker or insurance representative in order to ensure that their insurance cover remains accurate and premiums are as competitive as possible. Scrutton Bland offer insurance cover for all commercial and private vehicles. With almost 100 years’ experience of helping our clients find the right cover and managing claims, our team of specialists are on hand to help. For more information please contact Dan Bligh at daniel.bligh@scruttonbland. co.uk or 01206 838419
Another reason for increased premiums is climbing repair costs for the increasingly complex technology installed in modern cars. Repairs to sensors, cameras and other high-tech features can easily run into thousands of pounds. As if this wasn’t enough, premiums have been further hit by the ‘Ogden Discount Rate’ which the Ministry of Justice (MoJ) has reduced from 2.5% to -0.75% starting in March this year. What is the Ogden Discount Rate? The Ogden Discount Rate is a formula applied by the courts to the financial award given to a severely injured person so that they have the necessary financial security to provide for their care and loss of earnings. The discount rate is used to calculate the amount of compensation they receive to reflect the return they will earn when that money is invested.
What does the insurance industry say? Huw Evans, director general of the Association of British Insurers (ABI), which represents the insurance industry commented: “This increase drives home how important it is that the government press ahead with a new framework for the discount rate and call a stop to further hikes in insurance premium tax.” That comment should be balanced by the recognition that the discount rate of 2.5% has been considered as being far too high for a sizeable period. Many in the legal profession would say that the most seriously injured victims of accidents have been undercompensated for many years.
How will the new rate affect claimants? The reduction in the Ogden Discount Rate means that people suffering from serious injuries will receive significantly higher compensation payments than before. The MoJ says: “The law makes clear that claimants must be treated as risk averse investors, reflecting the fact that they are financially dependent on this lump sum, often for long periods or the duration of their life. Compensation awards using the rate should put the claimant in the same financial position had they not been injured, including loss of future earnings and care costs.” Can you give an example? John is 30 years old and was seriously injured in a car accident. At the time of his accident he was earning £25,000 net per annum. His injuries are so severe that he’ll be unable to return to work and he will need nursing care for the rest of his life. The cost of the nursing needed is currently £75,000 per year.
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