Personal Injuries Compensation – Discount Rate Change
What has changed?
The Government has changed the Discount Rate from 2.5% to -0.75%. This means that, rather than any lump sum award being discounted to allow for a 2.5% investment return, the indemnity settlement will be increased, reflecting a decision that over the long term there is predicted to be a negative return on investment.
The effect of this change will be to increase the value of claims for future financial loss. The change is most significant for younger claimants, for whom the settlement needs to cover the greatest length of time.
When does it take effect?
This will apply to all claims settled in England and Wales on or after the 20 March 2017 and Scotland on or after the 28 March 2017, regardless of when the loss was incurred or notified.
What does the change mean for me?
As mentioned above, the Ogden ‘Discount’ rate was set at a level to help ensure that when an injured person was paid today compensation for a loss of wages or for care that might be needed 30 or 40 years from now, the amount of that loss was discounted by an amount to allow for the interest they would earn before that money was actually needed. The concerns that inflation is higher than investment returns on ‘Gilts’ mean that instead of a discount, a small loading will instead apply. The difference between 2.5% and -0.75% doesn’t sound that much but here’s an example of how it could work in practice.
|+2.5% (Old Discount Rate)||-0.75% (New Discount Rate|
|Compensation for care expenses for this year||£40,000||£40,000|
|Compensation for next year||£39,000||£40,300|
|Compensation for year 3||£38,025||£40,602|
|Compensation for year 30||£18,715||£50,051|
|Compensation for year 40||£14,529||£53,934|
|Total for next 40 years||£963,926||£1,871,973|
Which lines of business/products are affected by the changes?
The Discount Rate applies to injury claims, so any product which provides cover for Motor (including Motor Trade) or Liability (Employers’ Liability and Public & Products Liability) will be affected. This includes Property-led products such as Property Owners and Landlords where liability cover is included.
So, does the change mean my insurance premium will increase?
The heightened cost of claims for insurers will mean an increase in the cost of insurance, in respect of those products that are affected, regardless of where the insurance policy is bought from.
Insurers have to ensure that today’s prices reflect the cost of claims in future years, which are now going to be significantly higher than they previously were.
How much will my insurance premium go up by?
The percentage change will differ depending on your individual circumstances, including the activities you undertake, your claims history and your exposure to severe injury losses.
I’ve never had a claim. Does this mean I won’t be affected?
Large losses are much more difficult to predict than small to medium ones. Previous claims history isn’t always an indicator of your likelihood to incur a significant claim in the future. Unfortunately, unpredictable accidents happen in all industries including those which are perceived as low risk.
Exposure within liability or motor lines of business will inherently carry a risk of incurring a liability for a claim involving a serious injury and therefore premiums need to reflect a proportionate allocation for potential large losses in the future. In this way, insurance acts as a pool, whereby an amount of premium is secured from everyone to create a fund to pay for the larger losses which statistically will occur from the relative few in the pool.
The exact amount of this will depend on a range of factors, including trade activities, approach to risk management, previous claims history and exposure to serious injury claims. But if the cost of large losses increases, then so must the contribution that everyone makes to the pool. That includes low risk and claims-free cases.