Personal injury compensation calculation change explained, why it is changing and the impact on insurers/consumers.
Discount Rate explained
Insurance premiums will rise following a decision to change how personal injury compensation is calculated from March 20th 2017, The Association of British Insurers claimed. Insurance companies, therefore, expect to pay more to compensate (say) motorists hurt by crashes, victims of medical negligence and people injured via work.
As of now, a victim receives a lump sum to pay for medical care and to compensate for loss of earnings. A 2.5% “Discount Rate” is permitted as the victim can make up any shortfall by investing. £1,000,000 invested at 2.5% returns £25,000 per annum, for example.
However, Lord Chancellor and Justice Secretary, Elizabeth Truss, has lowered the Discount Rate to -0.75% from March 20th 2017. The decision reflects the historically low-interest rates. On this basis, the insurance company has to make a larger, lump sum, payment if the victim's investment is to provide a suitable return.
Immediate impacts included:
- Direct Line Insurance Group PLC expects pre-tax profits to fall between £215 - £230 million;
- Admiral Group shares fell sharply following the change;
- premiums predicted to rise to compensate.
Lord Chancellor's statement
The Lord Chancellor said: “The law is absolutely clear.” She added: “I must make sure the right rate is set to compensate claimants. I am clear that this is the only legally acceptable rate I can set”.
Insurance industry criticises “crazy” decision
The Association of British Insurers – a body that “promotes best practice” within the industry - called the decision to lower the Discount Rate “crazy”. Its Director General, Huw Evans, suggested:
“Claims costs will soar, making it inevitable that there will be an increase in motor and liability premiums for millions of drivers and businesses across the UK. We estimate that up to 36 million individual and business motor insurance policies could be affected in order to over-compensate a few thousand claimants a year.”
He continued: “To make such a significant change to the rate using a broken formula is reckless in the extreme - and shows an utter disregard for the impact this will have on consumers, businesses and the wider operation of the insurance market.”
It seems there might be some room for manoeuvre, however. Chancellor of the Exchequer Philip Hammond - and Association of British Insurers Director General Huw Evans – released a joint statement a day after the Lord Chancellor's announcement. It said:
“It is important that going forward, personal injury discount rates are set at a level that is fair to both claimants and consumers. The Government will progress urgently with a consultation on the framework for setting future rates, and bring forward any necessary legislation at an early stage.”
“The industry will contribute fully to the upcoming consultation and the Government will carefully consider all evidence and arguments submitted”, it explained.