Review of personal injury discount rate set to have significant impact on 1.1 motor renewals

Guy Carpenter’s Amit Parmar on the implications of the review of the personal injury discount rate for England and Wales.

On 15 July 2024, the review of the personal injury discount rate (PIDR) for England and Wales commenced, five years after the last rate change. The process is conducted on a strict timeline, with the Lord Chancellor required to complete the review within 180 days. Proceedings are well under way with an expert panel to review the methodology and advise on setting the rate.

In the first week of October, we received news that the PIDR in Scotland and Northern Ireland moved to 0.5 percent. This marks a significant change from the previous rates of -0.75 percent for Scotland and -1.5 percent for Northern Ireland. The biggest component of the change was the increase in the investment return on the portfolio, while the deductions for tax and expenses increased by 50 basis points. This gives more certainty to the tax and investment deduction, following suggestions by the Scottish Government Actuary’s Department (GAD) that this deduction could have moved by up to 225 basis points.

In England and Wales, the new rate is to be set no later than 11 January 2025. This critical undertaking is creating heightened levels of uncertainty for motor insurers purchasing reinsurance at 1 January 2025. There is a possibility that the announcement will happen sooner rather than later, which may disrupt the renewals. A clear and concise Ogden strategy is needed by cedants and reinsurers in light of the above.

The impact on reinsurance treaties is greater on higher layers where larger proportions of claims are for future cost of care and loss of earnings, which are more heavily exposed to the PIDR.

Understanding the rate implications

To analyse the potential rate implications, Guy Carpenter applied its PIDR model to calculate a projected PIDR using the current GAD framework and a portfolio of assets with the current long-term horizon. The methodology builds on the GAD recommendation using long-term economic scenario generators provided quarterly by Mercer, our sister company. This methodology replicates the current calculation in 2019, i.e. a PIDR of -0.25 percent.

Our current 2024 H2 analysis shows an improvement in the central portfolio return due to higher returns in gilts and equities, which make up the majority of the portfolio.

We have run the deductions on two bases: the first where all deductions are the same as the current framework and the second where all tax and expenses are set at the higher Northern Ireland and Scotland assumptions.

74% chance rate will be 0.5% or higher

The result of this analysis shows that on the current England and Wales basis the median projected PIDR is 1 percent and with revised tax and expense deductions (as per Scotland and Northern Ireland) the PIDR median expectation is 0.5 percent.

GC Analytics has been conducting this analysis with the latest asset returns periodically since 2019 to ascertain the projected PIDR. This provides a valuable context for assessing the reinsurance implications of a PIDR change.

A considered approach at renewals

GC Analytics analysis also shows that while the reinsurance impact of a change in PIDR varies from portfolio to portfolio given the underlying risk and heads of damage components, on average a move to 0.5 percent PIDR will improve expected losses above £5mn by approximately 16-22 percent.

An analytics-based approach must be employed to recognise each portfolio’s unique PIDR exposure, reinsurance panel and current treaty performance in the assessment of the options open to an insurer.

For the 1 January 2025 reinsurance renewals, a key area of focus will be achieving a positive correction on excess of loss treaty pricing, accompanied by the feasibility of extensions or cancel and replace provisions. There are also options available to modify reinsurance contracts to be more equitable between the parties given a change in the PIDR, such as PIDR indexation clauses and PIDR adjustable rates.

Amit Parmar, managing director, lead actuary, UK P&C, Guy Carpenter