This past March, the government of the United Kingdom introduced the Civil Liability Bill into Parliament. While there is no definitive timeline for this bill to pass into law, it is likely that it will happen in the early part of 2019. The legislation provides for an initial review of the discount rate methodology to start within 90 days and that the review should take no more than 180 days. This means that by the end of 2019, there may well be a new discount rate in effect.
Sudden change in discount rate
They say that forewarned is forearmed—but when it came to last year’s change in the discount rate, insurers had no advance notice of how much the rate would be modified. When the government made the announcement at 7 a.m. on 27 February 2017, the unexpectedly deep cut from 2.5 per cent to negative 0.75 per cent took the industry off guard.
At that point, the discount rate hadn’t changed in 16 years. Now, legislation is in progress to ensure that the rate will be reviewed every three years, and insurance companies would do well to prepare for those reviews.
The industry uproar after the 2017 change was largely due to the massive shift in reserves needed to pay out claims affected by the new rate. The mad scramble to recalculate thousands of claims and move more money into reserving is something that no one wishes to repeat. Whilst the most recent government buzz indicates a more modest shift between 0 and 1.0 per cent, even this less dramatic change is more manageable with advance planning.
Many insurers do make some preparations for the rate fluctuations that will affect settlement figures for their complex claims. While these large losses make up only a small fraction of incoming claims, they can represent a significant proportion of reserves. It also involves a certain amount of guesswork.
Calculating payouts for complex claims
To calculate payouts for complex claims, claims handlers create huge spreadsheets with values for injury treatments, lost wages, and dozens of other expenses related to catastrophic injuries from devastating motor accidents. Some insurers require claims handlers to develop two or more additional versions of these figures calculated with different discount rates. In this scenario, if the company has guessed the correct new discount rate, their team is all set and ready to proceed.
Unfortunately, last time, no one anticipated the exact rate change, so any preplanning turned out to be a waste of untold man-hours. One insurer reported that, once the new rate was announced, it took nearly ten weeks to produce new reserves for its live claims. With all hands on deck to deal with the change, there was no movement forward on current claims, stalling work for weeks.
piCalculator from Verisk
There is a technological solution that can quickly adjust an insurer’s entire book of complex claims to new rates: piCalculator from Verisk. Last year, when the discount rate changed at 7:00 a.m., insurers using this software could have had new rates for all their complex claims by 7:05 a.m. Three to four weeks of a department’s work would have been completed automatically.
Using a software system such as piCalculator rather than relying on manual creation of spreadsheets has additional advantages, beginning with the lack of errors that can easily creep into large, complex tables.
In addition, when claims data is entered into this software system, it becomes structured—and that’s a game changer. Structured data can be easily analysed, and from there, insurers can make wide-scale improvements in consistency and other key performance indicators. The software has an easy intake function, so insurers can begin applying analytics to all their current claims right from the start—and be prepared to make adjustments as soon as the discount rate moves again.