How to Address the Recent Cut to the Personal Injury Discount Rate
The Lord Chancellor recently announced that the Personal Injury Discount Rate – a calculation used to determine lump sum compensation to claimants who have suffered life-changing injuries – would be cut from 2.5% to minus 0.75% from 20 March 2017. While this will inevitably increase the cost of some claims, our experience is that most insurance markets are reviewing their positon and it is too early to judge the impact on premiums.
What does the personal injury discount rate do?
The discount rate is used to calculate settlements for large personal injury claims when they include an element of future loss. Some claimants will choose to receive their compensation in a series of payments over time but most will opt for a lump sum. Part of the process for deciding the appropriate amount is considering how that lump sum payment when invested will grow over time, meaning a claimant is able to earn a return on that money for the rest of their lives. The Discount Rate is applied to ensure that the lump sum takes account of the expected return.
Our calculations indicate the cost for such claims could increase by 1.5–3 times under the new regime.
How does this impact you?
If your business has potential for large personal injury claims then this is relevant to you.
An increase in the size of claims will either need to be funded directly by you, if self-insured, or by your insurer. Your insurer may then pass some of these costs back to you. At this stage, the level of potential rate increase and the impact on long-term agreements (LTAs) is uncertain. However, proactive management of your risk and a detailed understanding of your claims profile will put you in the best position when it comes to negotiating renewal.
What to expect next?
It is important to note that the new discount rate may not remain at this level indefinitely. The Association of British Insurers, after being unsuccessful in forcing a judicial review, has pledged to appeal. Also, the Government has said it will review the framework and provide a consultation before the Easter recess.
In the meantime, what steps can you take?
There are three steps that we recommend you take now to mitigate the impact of this change on your business. Marsh can help you with each of these:
- Review your outstanding claims to quantify the impact of the rate change.
- Improve your strategy for risk reduction and claims defensibility.
- Prepare well in advance for renewal (steps 1 and 2 (above) will enable you to provide detailed information to insurers).