This week, the government announced that the discount rate on personal injury claim awards will be changing from 2.5% to -0.75% as of 20th March 2017.
What is the discount rate used for?
The discount rate is applied to calculate what insurers will have to pay on personal injury awards if some or all of the claim is settled early as a lump sum, rather than it being paid gradually on an annual basis. The discount rate is applied to avoid overcompensation as if the award is paid in a lump sum, it could be invested and the claimant would be able to earn interest. The rate was last set in 2001 to introduce a standard benchmark to prevent a discount rate having to be confirmed by judges every time an injury claim was made, and has resulted in claimants receiving different sums of money depending on whether they receive it all at once or over a period of time.
To work out how much would be needed over the claimant’s likely lifetime, a multiplier is applied to the claimant’s financial needs – i.e. the earnings they will miss out on, the cost of care needed. This multiplier takes into account age, gender, and mortality risks.
What does the change mean for you?
There are two main ways in which consumers will be affected by this change.
- Those receiving personal injury awards will be able to receive more money if they take an early settlement because of the reduction of the discount rate.
- Due to the increased awards, insurers are likely to increase premiums, which will be most obvious in products where there is a greater chance of injury. This includes Motor Fleet, Private Motor, Public Liability and Employers Liability.
EDIT: With more of our clients asking questions about the effects the new discount rate will have, we offer some additional information on how this will affect claims payments and the insurance industry, below.
Although insurers knew that a change was coming, it was not estimated that it would be such a significant change and the impact is anticipated to be great. Examples of how the industry will be affected in terms of changes in claims settlements can be seen in the table below (figures are taken from various readily available sources).
|@ +2.5%||@ -0.75%|
|Age||Gender||Claim Size||Claim Size||Claim Difference|
This significant impact on insurers offers an insight into why insurers may need to increase premiums. Aviva have already announced a charge of around £385 million due to the rate change whilst Direct Line took a hit of £230 million to its final year results, QBE took a £129 million hit and Admiral announcing one of £105 million.
If you would like more information about how the change in discount rate may affect you, you can contact the team on 01653 697055 or by emailing email@example.com.