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