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Businesses face fleet insurance increase after “crazy” government decision

Businesses face fleet insurance increase after “crazy” government decision

Businesses can expect fleet insurance premiums to increase - perhaps by 10% - following what the Association of British Insurers called a “crazy” decision to change the way personal injury compensation payouts are calculated.  

When victims of life-changing injuries accept lump sum compensation payments, the actual amount they receive is adjusted according to the interest they can expect to earn by investing it.  

In finalising the compensation amount, courts apply a calculation called the Discount Rate - with the percentage linked in law to returns on the lowest risk investments, typically Index Linked Gilts.  

The decision by Lord Chancellor Elizabeth Truss to lower the Discount Rate from 2.5% to -0.75% was made in accordance with the law and in her capacity as independent Lord Chancellor. The law makes clear that claimants must be treated as risk averse investors, reflecting the fact that they are financially dependent on this lump sum, often for long periods or the duration of their life.  

Compensation awards using the rate should put the claimant in the same financial position had they not been injured, including loss of future earnings and care costs.  

Defending her decision, Ms Truss said: “I am clear that this is the only legally acceptable rate I can set.”  

The Ministry of Justice admitted that the decision would trigger a rise in compensation payments thus leading to increases in insurance premiums - including those for fleets.

Huw Evans, director general of the Association of British Insurers, said: “Cutting the discount rate to -0.75% from 2.5% is a crazy decision. Claims costs will soar, making it inevitable that there will be an increase in motor and liability premiums for millions of drivers and businesses across the UK. We estimate that up to 36 million individual and business motor insurance policies could be affected in order to over-compensate a few thousand claimants a year.

The Discount Rate has been unchanged since 2001 and Mr Evans called the formula “broken” and said that the “significant change to the rate was reckless in the extreme”.   Ironically, simultaneously the government said it would launch a consultation before Easter to consider whether there was a better or fairer framework for claimants and defendants, with the government bringing forward any necessary legislation at an early stage.  

However, Mr Evans said: “We need a fairer deal for consumers and claimants. We cannot wait until Easter - the Ministry of Justice must commit to alternatives immediately so changes to the law can be included in the Prison and Courts Bill.”

RAC Insurance director Mark Godfrey said: “It is a bizarre decision from the government to make the first adjustment to the Discount Rate in 16 years at the very same time as it has effectively admitted the current system is flawed by announcing a consultation on finding a better and fairer framework for handling life-changing personal injury pay-outs.”  

He also highlighted that insurance premium were already due to rise in June when another 2% was added to Insurance Premium Tax.  

Mr Godfrey estimated: “The combined effect of this means that motorists are likely to see their premiums increase by 10% and some parts of the market, notably younger and older drivers, may see substantially higher increases.”  

The new discount rate will come into effect on 20 March 2017, following amendments to current legislation.