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The Discount Rate change – what it means for customers

On 15th July 2019, the Lord Chancellor announced that the new Personal Injury Discount Rate will be set at minus 0.25%, following a consultation process and as set out within the Civil Liability Act 2018.

The Discount Rate is a figure used to help calculate lump sum compensation payments for high value personal injury claims. It reflects the fact that someone getting a lump sum payment will typically invest it and will expect to get a return on it. The lower the rate, the higher the compensation awarded and the greater the cost to compensators, such as insurers and the NHS.

The Discount Rate was 2.5% for many years but was reduced to minus 0.75% in March 2017. The new rate of minus 0.25% will be effective for claims settled from 5th August 2019. It applies to England and Wales only; Scotland has the powers to set its own Rate.

ABI response

The new Discount Rate is a bad outcome for insurance customers and taxpayers that will add costs rather than save customers’ money. It will put further pressure on premiums.

We are deeply frustrated. It matters that this system works properly so accident victims get the right compensation and insurance premiums are affordable. The industry has spent two and a half years working with the Government, helping design and legislate for a more predictable and modern formula, only to have the Lord Chancellor override the recommendation of The Government Actuary’s Department without any prior warning. This sets a worrying precedent.

This will remain the lowest Discount Rate in the Western world, leaving England and Wales an international outlier at a time when we need to boost our attraction to international capital.

The Discount Rate: What do you need to know?

  • What type of compensation is impacted by the Discount Rate?

    Insurance policies that pay personal injury claims, e.g. motor insurance, public liability insurance, employers liability insurance, and where damage levels are set by the Courts are all potentially affected by the Discount Rate. Other compensators such as the NHS may also face higher costs.

  • What does this mean for insurance premiums?

    The change in the Discount Rate will lead to higher costs for insurers. This is because the Government had previously indicated that the rate would be set between 0 and 1% and most insurers were basing their claims costs on this, and not on the previous rate of minus 0.75%, in order to keep costs and premiums as low as possible. As the new rate is below this range, insurers will have to increase the money they set aside to pay future claims which will inevitably increase the pressure on premiums. This is especially true for younger drivers who are statistically more likely to be involved in the types of accident that lead to these claims.

    While motor insurance remains a very competitive market, in which individual insurers will make their own commercial decisions about premiums, PWC has estimated the Discount Rate change could lead to the average motor insurance premium increasing by between £15 and £25, going up by as much as £50 to £75 for younger drivers.

  • Why have insurers only been reserving (setting aside money) for a rate of between 0 and 1%?

    In September 2017, The Ministry of Justice announced measures to change the way compensation payments were calculated, and the Lord Chancellor said: “While it is difficult to provide an estimate, based on currently available information if the new system were to be applied today the rate might be in the region of 0% to 1%.” The MoJ could have updated this guidance to the market at any point in the last two years but didn’t do so, meaning insurers now have to make up the difference between what the Government previously advised and what it has ended up doing.

  • Where does this leave the Civil Liability Act, and the cost benefits from it that insurers are due to pass on to customers?

    If there are no cost benefits there is nothing to pass on. This outcome is more expensive for insurers than the Government had previously advised. However, it is worth noting that as well as setting out the process for future reviews of the Discount Rate, the Civil Liability Act includes other reforms, such as changes to the way whiplash claims are handled, which remain unchanged.

    Insurers’ commitment to pass on any cost benefits to customers remains. It is now more important than ever that the whiplash reforms in the legislation are implemented on time and in full.