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Personal Injury Discount Rate Reduced: Insurance Premium Reduction To Come?

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In August, discount rates will be reduced in personal injury claims. Tilly Bailey & Irvine Solicitor Mark Ellis explains the Lord Chancellor's update and the effects on insurance premiums... 

The Lord Chancellor recently issued a statement on the discount rate that is applicable to personal injury compensation payments, reducing the level from - 0.75% to - 0.25%.

This will come into effect from 5 August 2019.

The discount rate is a figure used in calculating claims for future losses, and any change in it can make a significant difference to the amount that an insurer will have to pay out on a claim.

An increase in the discount rate means that the level of compensation that insurers have to pay out will be reduced.  Indeed the Government’s impact assessment issued with the announcement states that the NHS will save £8 million a year from paying less in compensation than under the old - 0.75% rate. 

Insurers stand to gain up to £320 million a year as a result of the change in the discount rate. Clearly the insurers have benefited from this and the Government made it clear that as the insurers were the net beneficiary; they expected this to be reflected in reduced insurance premiums.

The impact assessment said that Defendants, including public sector bodies such as the NHS and insurers would benefit from the lower costs because of the reduction in the value of lump sum awards made. The impact statement went on to say there should be benefits in terms of lower insurance premiums. Will the insurance companies respond by reducing premiums? There is a statutory duty on insurers to report on the amount of savings generated by the reforms of the Civil Liability Act 2018 including the changes made to the discount rate.

This all seems to be good news in theory, says Tilly Bailey & Irvine Solicitor and partner, Mark Ellis.

What we see here is the insurance industry saving vast sums from the reduction in the amount of damages they will have to pay. That being the case it would seem obvious with that saving, that saving would be passed on and should be passed on in lower insurance premiums to all.

"Will it?" he asks...

"Unfortunately, notwithstanding this windfall and this gain to the insurance industry of £320 million a year, the insurers have not reacted well and have indeed suggested that rather than see premiums fall (notwithstanding the gain of £320 million), premiums will rise!

"This is yet another area where insurers have benefited from reforms in the personal injury sector by promising reductions to the Government yet the drop in premiums has simply not been seen. After all has anyone seen their insurance premiums go down over the last few years?

"the raft of reforms in the personal injury sector has seen costs and damages that insurers have to pay being reduced dramatically and more now with this discount rate reduction, yet it does not appear to have been passed on to customers. Indeed this saving to insurers seems to appear to be going direct into their back pocket and will continue to increase their profits more so with increased premiums."

A win, win situation for the insurers - certainly no benefits to the customers as promised.

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