However the High Court has ruled against their call for the Government to complete its previous consultation and recognising that this potential change could significantly impact Member organisations, Alarm is urging Members to contact the Lord Chancellor with their views or concerns on this matter.
What is the discount rate for personal injury damages?
It is the calculation used to adjust lump sum compensation payments to take into consideration what the claimant might expect to receive in returns from a reasonably prudent investment of the lump sum compensation they receive.
The last revision of the discount rate took place in June 2001, when the then Lord Chancellor prescribed a discount rate of 2.5% per annum to reflect the change in the average redemption yields on Index-Linked Government Stock (ILGS) at that time. The discount rate has remained unchanged since. Yet, for the past 15 years, ILGS yields have obviously been reducing.
In November 2010 the then Lord Chancellor, Kenneth Clarke, agreed to initiate a review of the discount rate. Little seems to have happened with a review despite consulting over three years ago and not publicising any outcome of that process. However, due to renewed pressure, the current Lord Chancellor, Elizabeth Truss has unexpectedly indicated a desire to deliver a decision on the discount rate by 31.1.2017.
The insurance industry have no insight or control of this decision making process, with the possible range of outcomes being a maintaining of the status quo, to potentially a negative discount rate being implemented for at least the earnings related elements of claims. This will relate to areas such as the wages of nurses and carers for the catastrophically injured which, account for a large proportion of the compensation amounts, as opposed to general damage awards which remain at predictable and acceptable levels.
The implications for Alarm Members
A major concern is that this change may, overnight, mean claim reserves on outstanding claims will need to be increased, potentially significantly. This is unexpected and will impact all local authorities who arrange insurance with significant deductibles and fund claims internally through their own insurance provisions. It will no doubt also have the effect of driving up the cost of future claims, again impacting the amount Member organisations set aside in their reserves for incurred but not reported (IBNR) claims.
Alarm is advised that when the rate was last changed, it immediately translated into an eight per cent increase in premiums on employers liability and a five per cent increase on motor insurance.
This potential change comes at a time when many Member organisations are already seeing a serious increase in claims costs and increases in premiums as a result of higher Insurance Premium Tax (IPT).