Skip to content

Blog post -

The Discount Rate: What next?

On the 27th February, the then Lord Chancellor and Justice Secretary, Elizabeth Truss announced an unexpected change that caused a major shock. With little warning, the Discount Rate used to calculate serious personal injury compensation payments was reduced from 2.5% to minus 0.75%.

The ripples of this change extend beyond insurers and include liabilities for clinical negligence claims faced by the NHS. Motor fleet and many other insurance customers are not immune from the financial impact of what the industry has labelled a ‘crazy’ decision.

The objective of compensation for the severely injured is to fund their ongoing care needs and their loss of earnings for the rest of their lives. Allianz firmly believes this is only right and fair. The Discount Rate is the method used by the courts to calculate the actual amount claimants receive to reflect the interest they can expect to earn through investment of a lump sum over their lifetime.

The Lord Chancellor reduced the rate from 2.5% to minus 0.75% which means compensation payments insurers pay will be substantially higher.The effect of this significant reduction is not confined to future claims. The new rate also applies to claims that have not yet been settled.

This markedly increases the financial liabilities faced by insurers which they have not had an opportunity to price for in previous years.

As a major commercial and personal lines insurer, we welcomed the Ministry for Justice’s (MoJ) subsequent consultation on the Personal Injury Discount Rate. The core of Allianz’s response to the MoJ spells out that the thinking behind the calculation of the Discount Rate is flawed. It assumes the injured person will only invest in Index Linked Gilts (ILG) but this is not what happens in practice. The vast majority of seriously injured people awarded large sums will consult a financial advisor and invest their funds in a diverse portfolio. This will traditionally be low risk investments but will be set up to achieve higher returns than ILGs.

It is important to establish that reducing the Discount Rate will ultimately be met by customers and tax payers.The scale of the change is already having a significant impact on all lines of business which deal with bodily injury claims.This includes Private and Commercial Motor, Motor Trade, Casualty (Employers Liability, Other Liability and Contractors Liability) and SME insurance.

Since February, the insurance industry has been lobbying the government for a change in the calculation Unfortunately, the outcome of the General Election means achieving an acceptable position for insurers and claimants alike is very unlikely to happen until 2018.

The ABI estimates that up to 36 million individual and business motor policies could be affected and are rightly concerned about the impact of rising costs.

The cost of UK personal injury claims is already amongst the highest in Europe which means the cost of insurance is already higher than in most European nations. This is an unhelpful truth for UK businesses looking to outperform the competition in Europe.

The industry will continue to push the government for change. One way for businesses to help is to focus on accident prevention and ensure that effective health and safety risk control measures are in place to reduce the risk of a serious incident occurring in the first place.

If you need any further information please speak to your insurance intermediary.

This blog first appeared in Fleet News on 21 June 2017

Topics

Regions

Contacts

Amy Yorston

Amy Yorston

Press contact PR Consultant 07794266474
Sian Baker

Sian Baker

Press contact PR Consultant 07891570995
Sara Robinson

Sara Robinson

Press contact PR Consultant 07918470463