Motor fleet insurance specialist and risk manager Gauntlet is urging fleet managers to act quickly to cushion what is likely to be a major financial blow when their insurance renewal comes around.
The Goverment is changing what is known as the ‘discount rate’ or ‘Ogden Rate’ – a calculation used in large personal injury claims settlements where the injured party is severely incapacitated and unable to enjoy their former quality of life.
Large settlements comprise two components – a lump sum paid by the insurer, lower than the total agreed compensation, and interest the claimant can earn by investing the lump sum.
Together, these are supposed to deliver the agreed settlement sum, which typically runs into thousands of pounds, in such cases.
Since 2001, the calculations have been based on the assumption that the injured party can access an interest rate of 2.5% for their lump sum investment.
However, given the sustained period of low interest rates, the Chancellor has moved the discount rate to -0.75%, as from March 20, 2017.
This interest rate now applies to both new and existing settlements, so insurers are having to use a significant part of their profits to ensure claimants who have had a settlement in the past, as well as new claimants, can receive the settlement sum agreed.
For every £1,000 in the settlement, £25 was formerly supposed to have been delivered by the 2.5% interest accrued each year, which meant that the insurer only paid £975.61 per £1,000.
With the new rate, they are now having to pay £1,007.56 per £1,000 in the settlement. This adds up to millions of pounds to find.
With their own reinsurance premiums suddenly rocketing in response, the reaction of insurers has been to immediately hike premiums.
Gauntlet Group says that its early conversations with insurers suggest that this could be as much as a 25% increase in premiums at renewal time.
Ian McCarron, Gauntlet Group director, says: “Fleet managers need to pro-actively tackle this issue.
"Burying heads in the sand until the renewal comes around will be of no use. The message has to be to act swiftly and start to manage risk now.”