Further Fallout From UK Governments Personal Injury Regulation Changes

Despite the fact that the UK government had previously been warned by insurers, and those representing potential personal injury victims, we have seen more fallout from recent regulatory changes. There is no doubt that the personal injury claims market was in need of a review but the severity of the changes and the unexpected announcements have certainly had a big impact upon the sector. So, why is there so much anger about the UK government’s personal injury claims regulation changes?

The Ogden Rate

The Ogden rate is a little-known rate used to calculate compensation where the victims require funding for a prolonged period of time. In theory the rate takes into account what you could expect to achieve with a savings account and discounts this return from the long-term package. Prior to the forthcoming change, which will go live on 20 March, the Ogden rate was set at 2.5%. The new rate has been set at -0.75% which will increase the value of compensation/cost awards. It is clear from initial feedback that nobody had expected such a dramatic change.

Lord Chancellor Liz Truss is under extreme pressure to at least put in place a consultation system for the future. There were hopes that the new -0.75% rate could be adjusted but this is now set in stone. One of the major concerns now is the potentially catastrophic cost to public services such as the NHS which have historically seen the largest number of personal injury claims in the UK. An array of public bodies will now need to review their personal injury claim reserves to ensure there is sufficient capital going forward. Ultimately, this major change in the Ogden rate will see taxpayers foot any future bill for public sector prosecutions.

Insurance Industry Up In Arms

Insurance giant Aviva believes that recent changes in the personal injury claims market could hit the company by up to £385 million this year. The company will take an exceptional charge when full-year results are posted at which point we will likely hear more about plans to mitigate this loss going forward.

We have also seen similar reactions from other leading insurance companies with Direct Line expecting to take a hit of between £215 million and £230 million after reinsurance recoveries. This pattern is being replicated right across the industry and we will no doubt see some significant changes to premiums once the dust has settled.

To clarify the situation, these multi-million-pound hits taken by insurance companies will not impact their operating profits but will have an impact on their Solvency II capital ratio. It is expected that the changes will reduce these ratios by around two percentage points and as they are a key measure of a company’s financial stability this could have an impact on share prices. We can only assume that the UK government was aware of the potential downside of making such significant changes to the Ogden rate.

Cycling Associations Take Different Views

In an interesting development, British Cycling and Cycling UK seem to have come to very different conclusions about the UK government’s announcement regarding personal injury claim limits. The government announced that the limit for small claims, in relation to road traffic accident soft tissue injury/whiplash claims, would increase to £5000. This means that claims up to this level will be heard in the Small Claims Court where legal representation would be paid for by the claimant.

At this moment in time, there is a difference of opinion between the two cycling organisations as Cycling UK believes the road traffic accident limit applies to cyclists while British Cycling understands this only applies to occupants of motor vehicles. It is a little strange that such a fundamental and seemingly very straightforward issue has caused such a divergence of opinion. Surely the UK government should be able to clear up this issue in a one-sentence press release?

Will Insurance Premiums Rise?

While insurance companies and some solicitors have been complaining about the changes in the personal injury claims market we all know who will ultimately pay the price for these increased costs. The likes of Aviva and other leading insurance companies will expect to take a financial hit this year but next year we will inevitably see premiums “adjusted” to take into account the cost of future claims. The simple fact is that the insurance industry works on a pooling basis taking account of patterns in claims and average rewards. So, as the average reward figure will increase significantly due to changes in the Ogden rate this will ultimately place upward pressure on premiums. However, is this the true picture?

It is interesting to see insurance companies issuing highly critical comments about the UK government and the way in which these changes have been handled. Nobody would disagree with the fact it has been handled disastrously from a public relations point of view but are insurance companies not forgetting the changes in maximum claims for the Small Claims Court?

The UK government believes that the changes in maximum claims dealt with by the Small Claims Courts will reduce significant legal fees, often paid by insurance companies. At the moment it is unclear but optimists suggest that reduced legal fees and the increased Ogden rate costs will offset each other. This is not the impression that the insurance companies are portraying at this moment in time but the UK government has already confirmed it will be watching carefully to see that cost savings are passed on to customers.

Were These Changes Too Much Too Soon?

One of the main problems with the ongoing reorganisation of the personal injury claims market is the fact it has been so long since any meaningful changes were made. As a consequence, when the UK government reviewed the situation it came to the conclusion an array of changes were needed sooner rather than later. In hindsight, perhaps the authorities did not give the industry ample time to work out the overall ramifications of the changes during the consultation period.

The confusion and anger that these changes have attracted will soon die down and the industry will come to terms with the new structure. We can only hope that the net impact of the changes does not result in a significant increase in premiums otherwise the government will simply be indirectly penalising the general public and businesses (not to mention public sector organisations). Promises that the government will consult more closely on Ogden rate changes in the future do not carry much sway at the moment as the industry attempts to come to terms with a changing landscape.