Comment on UK Government’s Decision to Change Discount Rate for Personal Injury Damages

LONDON, Feb. 27 -- Willis Towers Watson, an advisory, broking and solutions company, issued the following news release:

According to analysis by Willis Towers Watson, this morning's decision by the Lord Chancellor to cut the personal injury discount rate from plus 2.5% to minus 0.75% will cost the insurance industry, in particular the reinsurers of this market, a material one-off reserve charge of approximately Pounds5.8 billion. In addition, there would be a roughly Pounds868 million per annum increase in the cost of providing motor insurance in the future.

Stephen Jones, a Director at Willis Towers Watson, said: "The immediate impact of such an aggressive cut is going to be painful for both drivers and insurers. Reserves for past claims that have not yet been paid will have to rise, while the costs of future claims will also go up."

Willis Towers Watson expects UK motorists will be required to fund the cost of this change to the tune of between Pounds25 and Pounds65 per policy per year depending on the speed at which the motor insurance industry looks to re-establish its balance sheet strength.

"Looking beyond today's decision, we would strongly recommend that the Ogden rate, which until now had been left unchanged for 16 years, should be either regularly reviewed and revised or pegged to an independent economic indicator so that we do not find ourselves in a similarly difficult position in the future," said Stephen Jones.

In addition, Grange Turner, a Director at Willis Re, commented:

"The decision will come as a surprise to many because it is outside of the range of most modelled scenarios, and there are obviously implications for the purchasing of reinsurance. For a start, we are likely to see an increase in interest for retrospective solutions that protect insurers' balance sheets in cases where these have been weakened by the need to increase reserves.

"In terms of excess of loss, the position is not yet clear. Obviously the cost of lump sum awards is likely to increase, but we expect reinsurers to balance this with the fact that original premiums will also increase to compensate, and the number of claims settling as PPOs is likely to fall."

About the Ogden Discount Rate

When calculating the size of compensation awards, the courts have to make an assumption about how much interest the money will earn when it is invested. This assumption is known as the discount rate - the higher the rate, the lower the initial lump sum required. The discount rate has been set at 2.5% since 2001, but interest rates have fallen sharply since then.

About Willis Towers Watson

Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 40,000 employees serving more than 140 countries. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas -- the dynamic formula that drives business performance. Together, we unlock potential.

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