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Insurers Challenge Proposed Changes to Lump Sum Compensation Payments

The insurance industry is taking legal action against proposed injury claims reforms that would increase lump sum compensation payments for serious injuries.

When courts award lump sum compensation payments for serious injuries, a “discount” is often applied to the settlement. The discount represents an assumption about how much interest the lump sum will accrue if the claimant invests the settlement over his or her life expectancy.

Historically, the amount of the discount was influenced by the interest rate at the time. However, in 2001, the government set a fixed rate of 2.5 percent. This rate has remained unchanged since, despite the decline in interest rates following the financial crash of 2008.

According to a report in the Financial Times, insurance companies are unhappy with proposals announced by Justice Secretary Elizabeth Truss to reduce the discount rate to a percentage more appropriate to the current economic climate.

The Association of British Insurers (ABI) claims that a reduction of the discount rate would result in a substantial increase in the value of lump sum compensation payments and feels that the industry has not been fully consulted about the consequences of the proposals.

Speaking to the Financial Times, Huw Evans – the Director-General of the ABI – explained why the organization was taking legal action against the proposed injury claims reforms, saying: Insurers are open to a proper dialogue on how to reform the system, but this is not the way to do it”.

Mr Evans believes that the discount rate applied to lump sum compensation payments needs to reflect the actual returns claimants could receive, rather than relying on a single figure. “It is vital that claimants get the compensation they are entitled to” he told the newspaper, “based on a formula that reflects how they are likely to invest it”.

The consequences of a significantly reduced discount rate and higher lump sum compensation payments for serious injuries could eliminate any savings to motorists generated by the proposals aimed at cracking down on fraudulent whiplash claims. Mohammad Khan – at partner at PriceWaterhouseCoopers told the Financial Times: “It could increase the average price paid for motor insurance by 20 percent”, adding approximately £85.00 per year to the average car insurance policy.