Motor bodily injury reserves after a discount rate change

A rise in the discount rate from -0.75% to +0.25% lowers the present value of a fixed cash-flow pattern. For a 3.5-year duration, the first-order effect is about 3.5% of the discounted value, and convexity makes the reduction slightly smaller, around 3.4%. At -0.75%, £420m undiscounted is roughly £431m discounted (factor about 1.0266). At +0.25%, it is roughly £416m (factor about 0.9913). The gross reduction is therefore about £15m. This is a central estimate, not a precise answer: the actual impact depends on the claim-by-claim cash-flow pattern, the treatment of periodical payment orders, and whether the new rate applies to all heads of loss. The net impact is smaller because reinsurance recoveries are also discounted. If the £5m excess of £1m recoveries are concentrated in the large claims that dominate the reserve, their present value falls on a similar timetable. A reasonable net range is £8m–£12m. Gross and net differ because the reinsurance asset duration need not match the gross liability duration, and because recoveries are subject to limits and solvency tests. The risk margin should also fall as the net best estimate liability falls, but the SCR may move in the opposite direction if the capital model treats the rate change as a shock.

A flat duration hides the real cash-flow profile. Large bodily injury claims and periodical payment orders have much longer tails than small claims, so a single average duration overstates the sensitivity of short-tail claims and understates the sensitivity of the long-tail segment. The change also affects different heads of loss differently: future care costs may be discounted at the new rate, while some other elements may not. A better approach is to split the reserve into cohorts by claim size, injury type and settlement route, project cash flows by year, and discount each cohort using an appropriate yield curve rather than a flat rate. Reinsurance recoveries should be projected on their own settlement timetable, not assumed to match the gross liability. The calculation should also allow for uncertainty in the payment pattern and for the possibility that claimants or courts respond to the rate change by altering settlement behaviour. Finally, the result should be presented as a range with explicit assumptions, because a same-day estimate based on a single duration is only a rough indicator.

The board should be told that the gross technical provisions are likely to fall by around £15m, with a net own-funds benefit of perhaps £8m–£12m before any risk-margin effect. That is a range, not a release of capital. The report should distinguish gross and net impacts, state the duration and cash-flow assumptions, and flag that the capital model has not been recalibrated. The CFO should not treat the movement as a windfall: the SCR may change, the risk margin may fall, and reinsurance recoveries may be discounted differently from the gross reserves. Actions should include refreshing the reserving basis claim by claim, rerunning the capital model under the new rate, checking reinsurance recoverable values and counterparty exposure, and preparing a regulator communication if the net impact is material. The insurer should also consider whether the rate change affects pricing and product design, particularly for large bodily injury risks and periodical payment orders. Any reserve release should be phased and supported by evidence, not announced on the day of the rate change.