What do ‘discount rate’ changes mean for injury claims and insurance premiums?

The insurance industry has been fuelling press interest recently in the ‘discount rate’ applied in personal injury claims following the Government’s plans to change the rate to minus 0.75% from 2.5%.

So, what does it actually all mean?

The aim of the discount rate is to ensure that those who are seriously injured receive the right compensation pay out. They should be able to invest any ‘lump sum’ award so that year on year it maintains its value (ie, a pound now is worth a pound later). This then ensures that the needs for which they are being compensated (typically including care, rehabilitation and loss of earnings) can be met throughout their life – nothing more, nothing less.

With the discount rate unchanged since 2001, the impact of the last few years’ low interest rates has been that severely injured people have been running out of money to pay for their care while insurers have been reaping the benefit of not being asked to pay more.Insurers are claiming that the additional cash needed to fund this change will add around £70 to every motor premium if they are to maintain profit levels. However, in the eyes of specialist injury lawyers, this is just scaremongering.

The reality is that these rules only apply to:

• The small number of cases where someone has been so severely and permanently injured that there is a claim for ‘future losses’, usually to cover loss of earnings and care costs
• Instances where a lump sum is paid as part of a compensation settlement rather than having regular payments made for as long as they are needed. Ironically, most insurers have been trying hard to avoid settlements involving periodical payments.

Michael Wangermann, a personal injury specialist at Ashtons Legal, comments: “The discount rate change is welcome, all be it overdue. Whilst the insurers are complaining about the potential impacts on their profits, let’s remember the innocent victims who did not wish to be severely injured in the first place but were, and now face a lifetime of needs. Unfortunately, it is likely that there may still be some tweaking of the rules in the insurers’ favour, but for the time being at least the Lord Chancellor has gone some way towards redressing the balance between insurance company profits and the lifetime needs of the severely injured.”