Consumer Insurance may be Hit by Discount Rate Reduction

Insurers are uncertain about the impact that a reduction in the personal injury discount rate is going to have, with some suggesting that consumers might suffer as a result. A statement on the discount rate and the potential reduction is due this month.

The discount rate is a reduction in personal injury compensation payouts designed to take into account the additional money that will be earned on the settlement once it is placed in bank accounts or investments. The discount rate is currently 2.5% and has been at this level for some years, but many say that this is much greater than the amount of interest that the money will earn in the current economy. As such, campaigners have called for a reduction in the discount rate, which they say unfairly penalises claimants by cutting their settlements beyond any degree that bank interest could possibly make up for.

A statement on a potential reduction of the discount rate is expected by the end of this month, having originally been due in January. It follows a failed attempt by insurers to prevent any such change in the near future. Insurers say that they are concerned about the impact that this will have on their profits, and about the knock-on effect this will have on consumers as premiums increase to compensate.

Major motor insurance company Direct Line has delayed publishing its latest financial information to see what shape this month’s announcement will take. Previously, Direct Line has claimed that a reduction of the discount rate to 1.5%, which many expect to be the approximate likely figure, would cost the company around £131 million. However, more recently the company said that this would likely be an overstatement as, in anticipation of such a reduction in the discount rate, it has already been using the 1.5% figure to calculate its liabilities.

Willis Towers Watson, and insurance consultancy, has said that a reduction in the rate to 1% would carry an initial one-off cost of £1.7 billion industry-wide, and subsequent ongoing costs of £200 million. This, the company said, would be reflected in an annual increase of £5-20 for each premium.

The consultancy described the situation surrounding the discount rate as “a pressure cooker ready to blow.” Company director Andy Staudt said: “nstead of being reviewed and updated on a regular basis to ensure compensation remains fair reflecting prevailing economic conditions, the rate has been left unchanged for 16 years.”

Staudt continued: “Pressure has been building and appears to have reached a politically unsustainable level. The immediate impact of trying to defuse this pressure now will be painful in the short term.”

Some, however, have criticised the insurance industry’s response to the situation and suggested that insurers are merely attached to the higher reduction in payouts that the current rate offers them. When the Association of British Insurers’ (ABI’s) legal challenge to a potential discount was thrown out, Association of Personal Injury Lawyers (APIL) president Neil Sugarman remarked: “Insurers have been getting away with undercompensating vulnerable injured people for years.”