Operators prepare for truck insurance hike

With motor insurance premiums generally already at a peak, thanks to an increase in premium tax in last year’s Autumn Statement, rising vehicle repair costs and continuing bogus ‘whiplash’ claims, commercial vehicle operators may need to plan ahead to avoid a further increase in cover costs thanks to a change in the way in which damages for major personal injuries are decided.

Damages on large personal injury claims, where an individual is severely incapacitated by a ‘life-changing’ injury, are calculated using a formula using what is called the Ogden Rate, and is sometimes referred to as the Discount Rate.

Under the Damages Act 1996, the Ogden Rate is fixed by the Lord Chancellor, a cabinet member with responsibility for the courts.

Major claims are paid out as a single lump sum, which under the Ogden Rate is lower than the total awarded.
The discounted Ogden Rate allows for the interest which the claimant will receive on his invested lump sum to be counted as part of the compensation package, and since 2001 this has been set at 2.5 per cent.

However, this year the Treasury has recalculated the sum in the light of the very low returns on offer to investors since the financial crisis of 2008 and the Ogden rate is now set at a negative rate of -0.75 per cent – acknowledging that today’s interest rates are incapable of keeping pace with inflation.

For every £1,000 in the settlement, £25 was formerly supposed to have been delivered by the 2.5 per cent interest accrued each year, which meant that the insurer only paid £975.61 per £1000. With the new rate, insurers are now having to pay £1,007.56 per £1,000 in the settlement.

With their own reinsurance costs already increasing fast, there is an immediate impact on insurers’ profits; and many are raising premiums as a direct result.

Commercial vehicle specialist broker Gauntlet Group said that some of its insurers were talking of premium increases in the order of 25 per cent.

The broker is urging its haulage and courier clients to engage in a holistic programme of risk management. It says it is already working with businesses to lower their risk in order to offset the significant increase in insurance costs.
In so doing, they can save substantial sums that may offset the general increase in premiums caused by market forces, the firm says.

Gauntlet Group director Ian McCarron said: “HGV operators need to pro-actively tackle this issue, by talking to us and allowing us to create a risk management strategy for them.

“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.”

Mohammad Khan, UK general insurance leader at PwC, said: “The Lord Chancellor’s announcement on the Ogden rate was not anticipated by the insurance industry and is more than they were expecting.

“The announcement of a move to -0.75pc means many insurers will need to further increase their reserves, potentially impacting expected results for year-end 2017 for those who have already announced their results and year-end 2016 for those that have still to report.

“Unfortunately, this announcement will have a significant adverse impact on motor insurance prices that drivers pay and also commercial insurance rates paid by small businesses.”

The Road Haulage Association has also raised concerns.

“The effect of the change will be to increase the amount insurers have to pay claimants to reflect today’s lower interest rates,” said chief executive Richard Burnett.

“But the cut is bigger than most insurers expected. They have no choice but to increase their premiums and motorists and hauliers will have no choice but to pay them.

“We are very concerned that the formula used to set the levels of compensation, the Ogden rate, should be reviewed and updated annually. This would ensure that compensation remains fair and reflects prevailing economic conditions.

“The reality is that it has been left unchanged for 16 years. This is both irresponsible and unfair as businesses with high motor insurance costs such as road hauliers could be seriously affected. “