At the start of the week, Lord Chancellor Liz Truss announced that she was adjusting the discount rate from 2.5% to -0.75%, a move that will effectively increase the size of payouts.
Leading industry figures have warned that the effect on public sector budgets is likely to be significant and put both reserve levels and insurance premiums under pressure. The coming rise in IPT by 2 points to 12% would add to this pressure.
CIPFA chief executive Rob Whiteman said: “CIPFA is concerned that the changes to IPT and the discount rate will have a significant impact on the financial health of public services.
“As it will likely reduce funding levels for vital services that communities depend on, CIPFA believes that public bodies should be exempt from IPT. Unless this is done, there could be widespread repercussions for services that generate the greatest volume and cost of claims, such as highways, motor and housing, with a knock on effect on all parts of service delivery.”
Andrew Jepp, managing director at Zurich Municipal, told PF: “Local authorities are exempt from VAT, and there doesn’t seem a great deal of logic for them to not be to make them exempt from IPT either. It’s just a tax taken off local authorities that goes to the Treasury.
“It is appropriate for local authorities to protect themselves. We’re seeing sizeable claims. If an authority didn’t have insurance, it would have a sizeable impact on the finances. They’re going to have to start to putting away reserves, they’re going to have to become much more risk averse. Insurance is an appropriate mechanism to transfer risk and risk pool.
“To have IPT on top for a public sector organisation doesn’t make a great deal of sense.”
The change in the discount rate is likely to effect large, top-tier authorities, which tend to see the biggest personal injury claims. They would need to review their reserve levels to ensure they can meet larger payments, Jepp explained.
Additionally, insurers – who tend to bear the risk of very large claims – will have to look again at the premiums they charge their public sector customers. Worked examples shared with PF by ZM show significant increases in the amount that will be paid out once the discount rate is adjusted down to -0.75%.