A partial reversal in a change affecting personal injury payouts has been proposed – marking a victory for insurers but potentially reducing compensation for accident victims.
In March, the government introduced a new formula for calculating compensation payments for those who suffer long-term injuries.
The move prompted anger from the insurance industry, which said that premiums had risen as a result.
Now the government has had a re-think.
Following consultation, the Ministry of Justice will outline new draft legislation that would change the way the so-called discount rate is calculated.
This would need to be agreed by Parliament – a process that the government said would take months, not weeks. If it becomes law then insurance premiums could fall slightly, but compensation payouts could fall too.
How compensation works
Accident victims are paid compensation in a single lump sum, which in serious cases is supposed to support them for the rest of their lives.
But someone who receives that lump sum can actually increase that amount by investing it, and getting a cash return.
So to be fair to insurance companies, the payout was reduced accordingly.
That changed in March when this so-called discount rate was changed for the first time in 16 years
The Ministry of Justice decided to reduce the discount rate from 2.5% to minus 0.75% – a move which it said was determined by existing law.
The change was ordered because the formula assumes the victim will invest his or her money in government bonds.
But such interest rates – or bond yields – had fallen and had become negative, meaning accident victims would actually be losing money in real terms over the long run.
The change in March means insurance companies are paying a premium to accident victims, rather than getting a rebate on the sums they pay out.
Now the government is planning to change the rules. The Ministry of Justice said that, if the rate were set today under the new approach, it might end up within the range of 0% to 1%.
In other words, the rebate would return for insurers, potentially cutting premiums, and payouts, again.
Justice Secretary David Lidington will outline the draft legislation later on Thursday. Proposals include a panel of experts reviewing the rate every three years.
The move has been welcomed by the insurance industry, which had described the original cut in the discount rate as “crazy”.
Huw Evans, director general of the Association of British Insurers (ABI), said: “This is a welcome reform proposal to deliver a personal injury discount rate that is fairer for claimants, customers and taxpayers alike.
“The reforms would see the discount rate better reflect how claimants actually invest their compensation in reality and will provide a sound basis for setting the rate in the future. If implemented it will help relieve some of the cost pressures on motor and liability insurance in a way that can only benefit customers.”
Insurers, whose profits were hit by the original move saw their share prices rise slightly after the latest announcement.
“While the industry was prepared for a change to the discount rate, [the move in March] was a lot harsher than anyone had planned. Today’s changes won’t be applied retrospectively and will take time to take effect, but they should be cheered by investors,” said Neil Wilson, senior market analyst at ETX Capital.
However, the move will not be greeted as enthusiastically by lawyers who act on behalf of accident victims.