Personal injury pay-out review could affect insurers’ reserving
The Institute and Faculty of Actuaries (IFoA) has welcomed the government’s planned review of a key calculation used for setting personal injury pay-out rates.
The Ministry of Justice announced last week that the Lord Chancellor had begun a review of the discount rate for personal injury damages, currently set at 2.5%.
The discount rate is the cut made to personal injury pay-outs to account for money the recipient could theoretically make by investing the pay-out.
The discount rate is therefore a key consideration for insurers when setting reserves to pay personal injury claims.
Welcoming the review, IFoA chief executive Derek Cribb said: “Many of our members advise Insurance companies about appropriate reserves for personal injury claims. In particular, we appreciate the recognition that many factors will influence the setting of a suitable discount rate.
“Changing the discount rate will have an impact on those who must provide the compensation. However, the most important factor is ensuring that those who suffered personal injury, and in some cases life changing injury, receive suitable compensation for the injury sustained.”
The current discount rate was set in 2001 based on returns available from index-linked government stock (ILGS). Interest rates have since fallen sharply, hitting investment returns, and so the government has faced pressure to cut the discount rate accordingly.
The Association of Personal Injury Lawyers (APIL) claims legal action it took against the government over the discount rate triggered the review.
APIL president Neil Sugarman said last week: “People with lifelong injuries are continuing to be undercompensated, in some cases, by hundreds of thousands of pounds, because successive Governments have dragged their heels and failed to review the discount rate to reflect changes in the economy.”
But others have warned against a discount cut. Law firm Kennedys partner Christopher Malla said: “To assume a claimant only invests in ILGS is to ignore what actually takes place and this could over-compensate the claimant. Ultimately this could lead to higher costs for defendant bodies, such as the NHS and local authorities, and have a detrimental impact on already reduced public sector budgets.”