Insurers will be required to strengthen their reserves on an ongoing basis to account for the higher claims bill resulting from this significant cut. Indeed the effects are already being felt, with many of the motor market’s top insurers announcing multi-million pound profit hits and rates already beginning to climb.

Legacy risk insurers will also be feeling the squeeze; however it is important the market does not overreact. We consider the current impact in cases of asbestos-induced lung cancer, including mesothelioma (AILC), will be more muted, whilst having the potential to develop into a future problem.

Clyde & Co partners with a number of market leading insurers and reinsurers to manage their legacy risks in this area. Taking a holistic view, underpinned by our forensic accountancy practice, we have analysed our claims data to derive average market characteristics.

Average case

We calculate an average AILC claimant is aged 74, with an annual pension of £12,000, and a low diagnosed life expectancy, leaving a widow on a pension of £4,000.

The future loss of dependency is subject to a multiplier based on the claimant's life expectancy but for the injury (presuming that his widow would have outlived him). We commonly see a reduction of four years from the national average mortality figures, based on the typical claimant's underlying health and other factors.

For a 74 year-old, the dependency multiplier was 8.94 under the current discount rate. The new rate will increase the multiplier by 17%, to 10.49. The effect of the reduction on an average claim is set out below:

Unaffected heads of loss:

Old rate of 2.5%

New rate of -0.75%

General damages (PSLA)

£75,000

£75,000

Bereavement award

£12,980

£12,980

Funeral costs

£5,000

£5,000

Other care and general costs

£17,500

£17,500

Subtotal

£110,480

£110,480

Loss of dependency claim:

(12k+4k) x ⅔ - 4k

x 8.94 (old rate) or 10.49 (new rate)

£59,600

£69,900

Total

£170,080

£180,380

The impact of the new discount rate on this "average" claim is only around £10,000 or 6%. As average AILC claimants tend to be much older than claimants in other areas, the impact on their damages is comparatively low.

Whilst this figure represents the market average, insurers and reinsurers must scrutinise their legacy books with care, to identify any material deviation. Clyde & Co's combined legal and forensic accountancy practice actively conducts IBNR triages of client books to assess potential exposures.

Market effect

The market currently receives approximately 3,000 AILC claims per annum, which is broadly assumed to fall by around 100 cases per year thereafter. This translates, with the new rate, to a market increase of only £31m in 2017; which is a significantly lower increase than other types of claims.

Year

Cases

Total damages / £m

Old rate

New rate

2017

3,000

510

541

2018

2,900

493

523

2019

2,800

476

505

2020

2,700

459

487

2021

2,600

442

469

Five year total

2,380

2,525

However, the damages increase may be more significant in future. Both general and specific medical developments, particularly in the treatment of mesothelioma are resulting in increased life expectancy for many claimants. Second and third waves of claimants, typically from non-occupational sources, are younger than has traditionally been the case. Both these developments have the potential to dramatically increase the cost of future losses.

For example, changing the age of the average claimant from 74 to 64 would increase the compensation payment to £241,000 under the new rate; a significant impact of 16%. Across the market of 3,000 claims, this translates to an increase to £720m in 2017.

Additionally, advancements in medical understanding, particularly genetics, is likely to mean that it will be possible to determine the cause of the cancer when competing causative factors are present, such as asbestos and smoking. This has the potential to increase the cohort of cases which could push annual market compensation payments towards £1bn.

These factors have the potential to produce a greater impact on insurers than the reduction in the discount rate.