The news caused Insurer share values to fall
and Huw Evans the director-general of the Association of British Insurers (ABI) said:
Reducing the discount rate to minus 0.75% was a “crazy decision, 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.”
When victims of life-changing injuries accept lump sum compensation payments, the actual amount they receive is adjusted according to the interest they can expect to earn by investing it.
In finalising the compensation amount, courts apply a calculation called the Discount Rate – with the percentage linked in law to returns on the lowest risk investments, typically Index Linked Gilts.
The decision by Elizabeth Truss to lower the Discount Rate from 2.5% to minus 0.75% was made in accordance with the law and in her capacity as independent Lord Chancellor.
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.
Lord Chancellor and Justice Secretary Elizabeth Truss said:
‘’The law is absolutely clear – as Lord Chancellor, 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.’’
The Discount Rate has been unchanged since 2001.
Today’s decision, as well as seeing compensation payments rise, is also likely to have a significant impact on the insurance industry and a knock-on effect on public services with large personal injury liabilities – particularly the NHS.
But in the announcement to the London Stock Exchange this morning, four key pledges were made:
- the government has committed to ensuring that the NHS Litigation Authority has appropriate funding to cover changes to hospitals’ clinical negligence costs
- the Department of Health will work closely with GPs and Medical Defence Organisations to ensure that appropriate funding is available to meet additional costs to GPs, recognising the crucial role they play in the delivery of NHS
- the government will launch a consultation in the coming weeks to consider whether there is a better or fairer framework for claimants and defendants, with the government bringing forward any necessary legislation at an early stage
- Chancellor of the Exchequer Philip Hammond will meet representatives of the insurance industry to assess the impact of the rate adjustment
The consultation, which will be launched before Easter, will consider options for reform – including whether the rate should in future be set by an independent body; whether more frequent reviews would improve predictability and certainty for all parties; and whether the methodology is appropriate for the future.
The new discount rate will come into effect on 20 March 2017, following amendments to current legislation.
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