UK insurers have attacked the UK Government over their changes to the Discount Rate, a move that will cost the industry millions of pounds, and will see price increases in premiums for individual and business customers. This is the first time the rate has changed since 2001, and has been calculated based on the decline in strength of low risk investment schemes such as Investment-Linked Gilks.

‘Crazy’ personal injury rate change

The Government has been attacked by UK insurers after they have introduced ‘crazy’ plans which will change the way that we see personal injury pay-outs calculated. The move will see the largest insurances companies in the country lose millions of pounds in profit. 

The Ministry of Justice has announced that it is going to cut the discount rate from 2.5% to -0.75%. The discount rate is a rate which is used by insurers to calculate the lump sum which claimants who have suffered life changing injuries.

The insurance industry widely expected the rate to fall somewhere between 1.5% and 1%, and companies were understandably shocked by the announcement.

This has been the first time that the rate has changed since 2001, and it is set to come at a cost of millions of pounds to the insurance industry. The announcement caused shares to fall in some areas as far as 7%. Customers can expect to pay higher premiums on their insurance as a result of the changes.

The director general of the Association of British Insurers, who represent the insurance industry, Huw Evans, has slated the move, saying that Justice Secretary Liz Truss and the Lord Chancellor have made a ‘crazy decision’. He said: ‘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’

What is the Discount Rate?

• Known as the Ogden Rate, it is a calculation the courts use to work out how much insurance companies should pay customers who have experienced a life-changing injury
• Those who have experienced a life-changing injury will be paid in a lump sum or in instalments. Those who accept a lump sum payment will have their payment adjusted to account for the interest they will expect to earn by investing it.
• The rate which has be dropped from 2.5% to -0.75% is helped to calculate future losses.
• Under the old rate, a company would need to pay a claimant £975 on a £1,000 loss because:
• £975 x 0.025 = £25
• £1000 - £25 = £975
• This system expected that a claimant would expect to receive 2.5% interest a year on their payment, meaning that a £975 payment would become £1,000
• Under the new rate, would need to pay a claimant £1,007.50 in compensation because:
• £1,000 x 0.0075 = £7.50
• £7.50 + £1,000 = £1,007.50
• The law states that the Discount Rate must be linked to the lowest risk investments available, which are typical Index-Linked Gilts. The strength of these Government bonds has fallen drastically since 2001, prompting the change in the discount rate.
• The Ministry of Justice states: "The law makes clear that claimants must be treated as risk averse investors, reflecting the fact that they are financially dependent on this lump sum, often for long periods or the duration of their life. Compensation awards using the rate should put the claimant in the same financial position had they not been injured, including loss of future earnings and care costs."

The ABI thinks that nearly 36 million individual and business motor insurance policies will be affected. The premiums for these accounts will be increased to compensate for the payments of only a few thousand claimants each year.

Mr Evans said that changing the rate so significantly is ‘reckless in the extreme’, and described calculation of the change as a ‘broken formula’. He added that the changes show a lack of regard for the number of customers it will affect, whether it is individual or business customers, not to mention the insurance market as a whole.

He said that his group have warned the Government repeatedly that the change in Discount Rate would see customers face ‘significant’ price rises. He adds that the NHS will see compensation bills rise by nearly £1bn as a result of the change, something that he has described as a ‘massive own goal’.

The Lord Chancellor is the person who sets the Discount Rate, which is used by courts to help calculate future loss in personal injury cases. If a victim of a life-changing injury accepts a lump sum compensation payment instead of instalments, the actual amount that they receive will be adjusted depending on the interest that they can expect to earn if they invest the money. This is where the Discount Rate comes into effect, and the huge decrease in the percentage reflects the nature of the market.

The compensation which is awarded to claimants using the rate is meant to ensure that the victim of the life changing injury is in the same financial position they would have been in had they not been injured. The compensation amount is calculated based on factors including loss of earnings, as well as future and continued care costs.

The Ministry of Justice say that the law states clearly that claimants must be seen as investors who are averse to risk, adding that they are usually financially dependent on the lump sum they receive for a long period of time, sometimes even for their whole life.

UK general insurance leader at PwC, Mohammad Khan said that the Chancellor’s announcement was unexpected. He said that it means insurers must increase their reserves, resulting in a change in expected year-end results for companies who have already announced their results.

He added that the announcement will have an adverse effect on motor insurance prices both for individuals and businesses.

Contact our Personal Injury Solicitors Glasgow

For personal injury experts based in Glasgow, contact Dallas McMillan today on  0141 413 4292, or complete our online contact form.