The decision on Monday to change the Ogden rate to -0.75% comes with at least two very human costs.
Before we get in to this I want to make my personal position on this subject really clear so neither side of the debate can criticise. The cost of a personal injury claim is a cost that is borne by the person who caused the injury. The very positive benefit of having insurance is that it covers the individual so that they don’t have to pay it from their own pockets. Insurance is, in essence, a hedge that individuals take against the cost of a claim, that insurers price within the legal framework in which they operate and personal injury lawyers do the same. The £3bn issue facing insurers this week has been caused by successive governments of different colours not realising the shifting sands of interest rates also required for the framework to change.
So what about those human costs?
The first is to anyone who has had their claim settled since the rate was set at 2.5% and, more specifically, anyone who has had their long-term claim settled since 2008 when interest rates crashed. If you believe Liz Truss’ argument that the only legal level to put discount rate is -0.75% then, put simply, they have received a pay-out that is too low. They will suffer for the rest of their lives.
The second is to the thousands of people who work for insurance companies. The timing of this announcement is particularly cruel for those on profit related bonuses because, at the 59th minute of the 23rd hour of the financial year, profits have been slashed. For those on profit related bonuses that means their bonus has been slashed. Some people will have been relying on those bonuses. Some people will have worked very hard over an extended time to build to this. Some may even have been planning a change in their life or a holiday or an extension or to simply save for retirement. All gone.
Both sides of this debate are sore. Blame can be pointed in many directions, but the truth is that this is a systemic failure. Unlike the Oscars cock-up you can’t point a finger and say “that’s the idiot who caused this”.
The only logical solution would seem to be to set the discount rate as a percentage different from a secure interest bearing commodity, be it government gilts or something else. While the price of that commodity may vary by the second the discount rate to the commodity remains fixed. It means that every pay-out for every claim will have a slightly different discount rate because it depends on the rate at the time of the accident.
This might seem maniac as a suggestion, it would require quite a lot of computing power and would also create a need for companies to be able to forecast commodity prices as part of their reserving strategy. It would also mean that when interest rates change then the price of car insurance would also have to change. But the good news is that interest rates are so low that increasing rates are likely to reduce reserving and, therefore, reduce price or increase profit (or both).
This plan might seem like a crazed plan from someone who isn’t an actuary and who doesn’t understand the nuances of insurer financing. I don’t, I freely admit. What I do understand is what it must feel like for those who are injured through no fault of their own and those who have worked hard to have their bonus taken away through no fault of their own.
For the long-term health of the industry and for those we seek to protect we need to do something radically different. We can and we should.
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