The discount rate for personal injury claims will be set at minus 0.75%, the Ministry of Justice (MoJ) has announced. The new Discount Rate will come into effect on 20 March 2017, following legislative amendments. The Association of British Insurers (ABI) called the changes a ‘crazy decision’, saying that claims costs will soar and lead to an increase in premiums for millions of UK drivers and businesses.
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Currently, victims of life-changing injuries receive a lump sum compensation payment adjusted according to the interest they can expect to earn by investing it.
When finalising claims, the compensation courts apply the ‘Discount Rate’ calculation, with the percentage linked in law to returns on the lowest risk investments, typically Index Linked Gilts. The Discount Rate has been unchanged since 2001.
New discount rate
The MoJ has now announced a lower Discount Rate, from 2.5% to minus 0.75%.
This has been done, the MoJ said, because the law ensures claimants must be treated as risk-averse investors, reflecting the fact that they are financially dependent on this money, sometimes for long periods or all of their lives.
Composition awards using the rate should, therefore, ensure individuals are put in the same financial position as if they had not been injured, including loss of future earnings and care costs.
While this change will see compensation payments rise and have a significant impact on the insurance industry and those public services with large personal injury liabilities, the government has pledged that:
- the NHS Litigation Authority will have appropriate funding to cover changes to hospitals’ clinical negligence costs
- the Department of Health will work closely with GPs to ensure appropriate funding is found to meet additional GP costs
- a consultation will be launched to consider other frameworks for claimants and defendants
- the Chancellor will meet representatives of the insurance industry to assess the impact of the rate adjustment
‘A crazy decision’
ABI director general Huw Evans called the changes ‘a crazy decision’, noting that: ‘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.
‘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.’
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