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‘Taken many by surprise’: Insurance firms brace themselves for personal injury discount rate cut

In a move that could increase the future loss element of personal injury claims by 30% in catastrophic cases, the government is planning to significantly cut the discount rate that calculates the value of injury awards.

Lord Chancellor Elizabeth Truss announced plans yesterday (27 February) to reduce the rate used to limit the lump sum awarded for injuries to factor in investment of those damages in future years. However, the rate cut from 2.5% to -0.75% was above industry estimations and represents the first change in 16 years.

The changes could add 30% to future losses for catastrophic injury cases, and 50% to high-value clinical negligence claims involving children, according to City insurance firm Kennedys. The discount rate had been calculated against index-linked government bonds, but recently had failed to account for the significant drop in yields.

RPC head of liability Gavin Reese said: ‘Depending on life expectancy, future awards could go up by significant percentages. The Lord Chancellor has based the rate on an assumption that claimants will only ever invest in index-linked gilts, the lowest risk form of investments, despite many respondents to the consultation making the case that a mixed portfolio approach was more realistic.

‘The changes will come in on 20 March, so there is not long to prepare and it’s been a long time since the last a change in 2001. Although the insurance industry anticipated movement downwards in the rate, it’s fair to say the reduction has taken many by surprise. Most insurers are still trying to get a handle on what impact this will have on their book of business. In the short term, it is inevitable that the costs of claims will rise significantly.’

The announcement saw shares in leading insurers fall as businesses moved to calculate the future losses. The move could significantly increase insurance premiums to make up for the change, calculated at £50-£75 by PwC.

Kennedys partner Christopher Malla said: ‘We don’t pretend that this is an easy balance to find but in Europe and the USA, the discount rate is significantly higher than even the old rate, which indicates just how out of step we have now become.’

Additionally, the Association of British Insurers predicted the changes could increase NHS compensation bills by £1bn. Last month, Legal Business reported the NHS Litigation Authority (NHSLA) had upped its potential legal spend ahead of its panel review.

In a statement, Truss said the government would commit to ensuring the NHSLA had appropriate funding to cover changes to negligence costs. The government is set to run a further consolation before Easter for reforming how the discount rate is set.