The Lord Chancellor has announced a change in the discount rate, which is a figure used to help set compensation pay-outs when people suffer serious injuries, for example following a car crash or medical negligence. It has been reduced from 2.5% to -0.75%, effective from 20 March 2017.
Some claimants choose to receive their compensation in a series of payments over time but most will opt for a lump sum. Part of the process for deciding the appropriate amount is considering how that lump sum payment when invested will grow over time, meaning a claimant is able to earn a return on that money for the rest of their lives. The Discount Rate is applied to ensure that the lump sum takes account of the expected return. It is a calculation used by justice systems all over the world, and the UK is not unusual in having a process of this type.
The Association of British Insurers have challenged the change and would like the discount rate to be as accurate a reflection as possible of what happens when people receive a lump sum payment. The trade body believes the Ministry of Justice has announced a new figure based on an outdated method which does not reflect current investment practices and the investment environment. They are concerned that the change will risk distorting the compensation process and lead to an increase in insurance premiums.