Changes to the Discount Rate last year have left many organisations without adequate protection against future insurance claims, as the level of potential compensation payments has substantially increased.
Businesses should review their limits of indemnity with their insurance broker to ensure they are fully protected against a future injury claim.
What is the discount rate?
The Discount Rate is used to calculate compensation for long-term injuries, and works on the basis that those receiving compensation will invest it to provide support or medical care in the future.
The aim in applying a Discount Rate is to ensure that claimants receive no more or no less than the full compensation that they are entitled to as a result of their injuries.
The rate was originally set in 2001 but, following a review by The Lord Chancellor in 2016, the rate was amended in March 2017, with a reduction from 2.5% to -0.75%. These changes mean the level of potential compensation payments has substantially increased, and you may need to review your limit of indemnity.
What has the impact of the Discount Rate change been in reality?
- The ABI estimated an immediate impact of £7 billion to historical claims and an increase of £1.4 billion of on-going annual claims.
- The National Audit Office estimated that the revised rate would end up costing the NHS over £500 million in compensation claims.
- Most motor insurers immediately increased premiums and claims reserves across their entire portfolio. In some cases the premium increases were in excess of 10%.
- Liability insurers were more circumspect and, despite increasing their claims reserves by 6% -10%, tried not to transfer the increased potential cost straight onto the customer without considering the trade or individual risk exposure.
- Brokers and client entered into more meaningful discussions around the adequacy of current indemnity limits and the respective organisations’ exposure to personal injury claims. Indemnity limits for many clients were increased.
What is the impact on compensation payments?
A 30-year-old man, who has suffered injuries making him unable to work, might typically have received £100,000 per year for care costs and loss of earnings. This would have resulted in a lump sum compensation payment of £2,791,000 in January 2017 using the 2.5% discount.
Under the current rules using the -0.75% discount the compensation payment would increase to £6,325,000 today. This represents an increase of £3,534,000 for a single case.
Civil Liability Bill 2018 – a further Discount Rate review
- Shortly after the Bill is passed the Lord Chancellor will undertake a review of the Discount Rate to ensure claimants receive 100% compensation but are not over compensated.
- A further review of the rate will be undertaken every 3 years to ensure these principles continue to be met.
- Continuing evidence will be gathered around claimants’ investment behaviours to ensure that the proposed compensation framework is accurate.
- An independent panel of experts will be gathered together to participate in the review process and their findings made public.
- Different classes of claim may attract different discount rates to ensure compensation takes into account different durations of loss, different tax and investment costs.
- Impact analysis of discount rate change will be undertaken on things like insurance and clinical negligence.
- Consideration will be made to greater use of Periodical Payment Orders (PPO) which would help to spread the financial risk.
The future – uncertainty to continue
- It is likely, but not certain, that there will be a change to the Discount Rate.
- Even if the most recent Civil Liability Bill is passed it is possible that the results of the review will not be implemented until 2019.
- The “knee jerk” reaction of some insurers to the initial changes will be replaced by a more considered approach. However, the reality is that the increased exposure to larger personal injury losses remains until such time as the rate is increased. Therefore, indemnity limits will still require careful consideration as to their adequacy.
Is your organisation adequately protected?
Changes to the Discount Rate last year have left many organisations without adequate protection against future insurance claims, as the level of potential compensation payments has substantially increased. Businesses should review their limits of indemnity with their insurance broker to ensure they are fully protected against a future injury claim.
Talk to us
If you need advice, or need to review your insurance cover, please contact your Stackhouse Poland representative. Please call 0330 660 0401 or email us at firstname.lastname@example.org