The UK government has said it plans to change the discount rate – also known as the Ogden rate – for personal injury lump sum compensation payments to -0.25% from -0.75%.
It applies from 5 August and follows a review initiated by the government last year.
The discount rate has been a major concern for insurers after the UK government last set it at -0.75% in February 2017 from 2.5% previously. The move sparked an outcry by UK insurers and insurers had to put an estimated £5.8bn ($7bn) into their reserves.
A lower rate matters to insurers because it would require them to make larger lump sum payments for personal injury claims. This is because it assumes claimants will receive lower annual investment returns for that amount.
Most insurers had been setting their reserves and pricing based on an Ogden rate of between 0% and 1%, following guidance from the Ministry of Justice in September 2017.
David Williams, managing director of underwriting and technical services at Axa Insurance, described the rate change as “disappointing to say the least” and said it does not provide the equality of compensation hoped for and expected.
Williams commented: "A negative rate simply does not reflect the economic reality of the investment opportunities for those receiving lump sum payments and, whilst reform was certainly needed to ensure fair compensation for accident victims, the rate announced today causes other problems.
“Minus 0.25% is below the level that most commentators were expecting, below the rate insurers have been using for pricing, and below the level most claims have been settling at whilst we awaited the announcement.”
He added that the new rate may stop the reduction in motor insurance premiums seen in recent months, as well as place a huge burden on the National Health Service.
Andrew Hibbert, a partner and head of the catastrophic injury team at law firm BLM said: “We haven't yet seen the reasons for the decision, but the new -0.25% rate is a disappointment to us and our insurance clients since we've very recently been settling cases at plus 0.5% and above - we'd hoped the new rate would be around that number.”
“I am doubtful that this new rate removes the risk of over-compensation which the government itself said was significant at the previous rate of -0.75%. The more positive aspect is that the setting of the discount rate should at least remove uncertainties associated with resolving claims and should help bring cases to a close more quickly.”
Gordon Dalyell, president of the Association of Personal Injury Lawyers, said: “We welcome the Lord Chancellor’s decision to set the discount rate at -0.25 per cent, after uncertainty about the impact of the government’s new approach of setting the rate on the basis that injured people should be considered ‘low risk’ investors.”
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