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Truss makes radical change to PI discount rate

27 February 2017

A radical change to the discount rate applied in calculating personal injury compensation payments was announced today by Lord Chancellor Liz Truss.

From 20 March 2017, the rate will change from 2.5% to minus 0.75%.

The rate is applied to lump sum compensation payments for injuries with long term effects, to reflect the interest claimants can expect to earn by investing them. The change means that instead of lump sums being reduced to reflect assumed income accruing to the fund, they will be increased to reflect assumed loss of value.

Claimants have to be treated as risk averse investors, reflecting the fact that they are financially dependent on their lump sum, maybe for the rest of their life. The percentage is linked in law to returns on the lowest risk investments, typically index linked gilts. The present rate has been unchanged since 2001, despite the significant changes in investment returns especially since the financial crash of 2008-09.

In a statement the Lord Chancellor said: "I am clear that this is the only legally acceptable rate I can set." However she recognised that as well as seeing compensation payments rise, her decision was likely to have a "significant impact" on the insurance industry, and a knock-on effect on public services with large personal injury liabilities, particularly the NHS. She pledged funding for the NHS in England & Wales to cover changes in clinical negligence costs, and to meet additional costs to GPs.

The Government will also launch a consultation in the coming weeks on whether there is a better or fairer framework for claimants and defendants, with a view to early legislation.

Options for reform will include whether the rate should in future be set by an independent body; whether more frequent reviews would improve predictability and certainty for all parties; and whether the methodology is appropriate for the future.

Chancellor of the Exchequer Philip Hammond will meet representatives of the insurance industry to assess the impact of the rate adjustment.

The industry, which had threatened legal action ahead of the announcement, reacted with dismay. Huw Evans, director general of the Association of British Insurers, called the decision "crazy" and warned there would "inevitably" be increases in motor and liability premiums.

He added: "We estimate that up to 36m individual and business motor insurance policies could be affected in order to overcompensate a few thousand claimants a year.

"To make such a significant change to the rate using a broken formula is reckless in the extreme, and shows an utter disregard for the impact this will have on consumers, businesses and the wider operation of the insurance market."

The Government recently claimed that controversial changes to the law on lower value personal injury compensation claims in England & Wales, aimed at reducing whiplash claims, would lead to reductions in motor premiums, but critics questioned whether insurers would pass these on.

 

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