The Ministry of Justice has announced (27 February 2017) that they will be reducing the Discount Rate that is applied to personal injury compensation claims from 2.5% to minus (-) 0.75%. The new discount rate will take effect on 20 March 2017.

The Discount Rate has been set at 2.5% since 2001 and is a formula that has been used to calculate a reduction to the amount of compensation that a claimant receives for future loss based on what they might earn in interest if they invested their award. The law, as it stands, assumes that the victim invests their compensation in Government Bonds, the return on which, in real terms, has become negative once inflation is taken into account.

The first impact of the change is that accident victims are likely to receive higher compensation awards, which is a good thing according to APIL, the Association of Personal Injury Lawyers, who said “People already coping with the most severe injuries have been deprived of the help and care they need for years,”

Secondly, however, the result of the insurer having to pay higher personal injury payout costs is that insurance premiums will no doubt rise. Insurance company share prices fell as a result of the news. Lord Chancellor and Justice Secretary Elizabeth Truss said “The law is absolutely clear – as Lord Chancellor, I must make sure the right rate is set to compensate claimants. I am clear that this is the only legally acceptable rate I can set”. The government press release can be read here.

Huw Evans, director-general of the Association of British Insurers said that “claims costs will soar, making it inevitable that there will be an increase in motor and liability premiums and that up to 36 million individual and business motor insurance policies could be affected.

The change in the rate will also have an effect on the NHS, where the cost of Medical Negligence compensation awards will also increase significantly. The Government has, however, promised that the NHS Litigation Authority will be given the appropriate funding to cover any increases.

Steve Webb, TSP Clinical Negligence Solicitor said ‚ÄúThis is a massive step forward for the victims of serious injury, whether caused by road accidents, accidents at work or medical mistakes. It is frankly long overdue.”

Quotes featured in this article can be found here.