Personal injury discount rate change: the impact on (re)insurance now and in the future

On 2 December 2024, the personal injury discount rate (PIDR) for England and Wales was set to 0.5 percent, effective 11 January 2025, by the Lord Chancellor following advice from the expert panel to set the rate between 0.5 percent and 1 percent.

The process finished six weeks before the deadline of 12 January 2025. This comes ahead of the Christmas recess and, more importantly, the 1 January motor excess of loss reinsurance renewals, which ends the uncertainty around the PIDR assumption for insurers and reinsurers.

This moves England and Wales on to the same rate as Scotland and Northern Ireland, which was set at the end of September.

The 75 basis point increase is in line with GC Analytics’ Ogden forecast model at the end of July and updated in October.

Understanding the implications

Policyholder premiums

There is a theoretical saving to motor policyholders from an increase in the PIDR, with greater reductions for catastrophic personal injury claims from younger claimants than older claimants. The reduction in policyholder premiums represents £42 on average for 20-year-olds and only £8 on average for 60-year-olds.

Of course, there are many factors to take into consideration such as the sophistication of pricing systems, inflation, competition and the projection of future care costs. These reductions will happen over time rather than overnight.

Reinsurance premiums

In terms of reinsurance, the effect is bigger due to larger claims having more significant exposure to future loss of earnings and cost of care, which are calculated with the PIDR. The reduction in claim cost is larger as you move up the reinsurance layers.

For a portfolio of motor risks with an average risk profile, Guy Carpenter would expect a reduction in the expected losses of 10 percent to a £4mn excess £1mn layer, and 18 percent to an unlimited excess £5mn layer.

The exact reduction in reserves will depend on the portfolio risk profile, claims settlement strategy, and reserving philosophy amongst other things.

Context to understand future rate implications

Under the current framework, the PIDR has to be reviewed every five years by the Lord Chancellor. Naturally, due to the long-term settlement nature of large bodily injury claims, our attention turns to the next PIDR decision.

Examining the macroeconomic history will help quantify the long-term steady-state of the UK economy.

Between 1985-2001 the PIDR was not explicitly set but was linked to the assumed rate of return on index-linked government securities that were thought to be around 4-5 percent. This a simple method to analyse the UK economy, however, the PIDR is now set with a 43-year view and on a basket of assets with deductions for tax, expenses and an element of prudence.

The long-term implied real curve shows the depressed economic conditions that were sustained between 2015 and 2022 due to ultra-low interest rates and quantitative easing-led inflation as well as the effects of Brexit and Covid to name a few.

This perfect storm produced long-term negative yield rates – a situation that has not been witnessed since the 1970s. The impact was the negative PIDR environment from 2017 to 2024.

By a number of economic markers, the UK economy is heading back to a mean-reverting real rate with current nominal levels of interest and core inflation at more normal levels.

On the balance of probabilities this leads to more favourable economic conditions than negative ones, and hence the PIDR reaching historical average higher levels at the next review in five years’ time.

Amit Parmar is a managing director at GC Analytics