New MOJ legislation will see fleet claims costs soar

With 1 in 4 crashes involving a business driver[1] when you operate a fleet of vehicles there is always the risk of a claim occurring. However, with changes in legislation coming into effect in March the cost of these claims is likely to significantly increase. And if the cost of claims increases then insurers will raise premiums.

Indeed less than a day after the announcement we’ve already had insurers quoting rate increases of up to 25% while citing the ruling as the core reason.

What has changed?

The Ogden rate, also referred to as the discount rate or personal injury rate, is designed to help calculate future losses in personal injury and fatal accident cases. When courts assess compensation awards they take into account how much interest could be earned based on the discount rate.

Since 2001 the rate has been set at 2.5% meaning this amount is discounted from the compensation insurers would pay. From March 20 2017, the Ministry of Justice will change the discount rate to -0.75% meaning initial payments from insurers will be significantly higher.

Of course, the reason given for this rate is the change in yields from the bond market, which is still in a state of flux.

The Association of British Insurers (ABI) has criticised the decision stating claims cost will soar[2]. For example, a man in his early twenties who suffers a brain injury following a road traffic accident and faces a future care bill of £200,000 per annum would expect to receive a compensation award of £9m under the current discount rate of 2.5%. Following the changes in the discount rate to -0.75% he could receive over £20m in compensation[3].

This change makes it inevitable that there will be an increase in motor and liability premiums. In fact the ABI estimates that up to 36 million individual and business motor insurance policies could be affected[4].

Although accepting the need for reform in light of the current financial markets brokers and insurers are petitioning against the ruling in order to protect clients.

Reducing the risk (and premium)

This is where a dedicated approach towards risk management can really pay off. Potentially lowering your premiums, reducing business disruption, as well as protecting your employees. This could include:

  • Reviewing the basic procedures for recruitment, induction and vetting drivers.
  • Implementing a positive safety culture towards driving that is evident throughout the entire organisation.
  • Reviewing and monitoring claims trends / statistics, after all an estimated 75 per cent of commercial insurance expenses are claims-driven.[5] Create and implement a plan to minimise the risks eg driver training, targeted campaigns on accident types.
  • Reviewing in-vehicle technology requirements and implement a plan to maximise the potential of the technology purchased.

No business wants to incur additional unexpected costs. With proper planning and a positive approach towards risk management there are steps that can be taken to help reduce the potential impact.

The Insurance industry is also continuing to work with the Government to minimise the uncertainty for clients. The ABI and a number of insurers met with the Chancellor of the Exchequer Philip Hammond to discuss the impact of the rate adjustment. Following the meeting, the Chancellor confirmed the Government will progress urgently with a consultation on the framework for setting future rates, and bring forward any necessary legislation at an early stage[6]. The consultation, which is due to commence before Easter, will consider whether[7]:

  • the rate should be set by an independent body in future
  • more frequent reviews would improve predictability and certainty
  • the methodology is appropriate for the future.

Our focus is to support our clients so we will continue to update you as these developments take shape.

[1] http://www.drivingbusinesssafely.org/statistics.php

[2] https://www.abi.org.uk/News/News-releases/2017/02/BI-RESPONDS-TO-CHANGES-IN-PERSONAL-INJURY-DISCOUNT-RATE

[3] http://www.irla-international.com/wp-content/uploads/2017/02/Weightmans-LLP-The-Lord-Chancellor-reduces-the-discount-rate-to-0.75.pdf

[4] https://www.abi.org.uk/News/News-releases/2017/02/BI-RESPONDS-TO-CHANGES-IN-PERSONAL-INJURY-DISCOUNT-RATE

[5] Zywave: Risk Insights Manage cost of risk and control price 2013

[6] https://www.abi.org.uk/News/News-releases/2017/02/Chancellor-meets-insurance-sector-leaders-to-discuss-personal-injury-discount-rate

[7] https://www.gov.uk/government/news/new-discount-rate-for-personal-injury-claims-announced