Concerned about rising insurance premiums? Hearing rumours
in the press about the ‘discount rate’ and injury claims potentially inflating
premiums and wondering what they are talking about?
Well, to put it simply, if you are involved in a horrific
car crash through no fault of your own, and you are left with life changing
injuries such as paraplegia or quadraplegia, you will be entitled to
compensation. Rightly so – your life will never be the same again – you may
need ongoing physiotherapy or rehabilitation, you may need your property
adapting for a wheelchair, you may need carers to look after you, and you may
never be able to work again. That’s what insurance is for – the many pay to
look after the few.
The lump sum compensation you receive is designed to be
sufficient for what you need – no more, no less. As you are likely to spend it
over many years, it is recognised that your compensation will be boosted by
bank interest. To counteract this, a percentage is deducted by the insurer from
your compensation to reflect what you will earn on your investments. This
percentage is the discount rate.
So that’s the principle, but what about the practice? The
discount rate had been set at too high a rate – it is a historic figure from a
time gone by that has no relevance in the current economy. It had not been
revisited for years and had led to those most seriously injured being undercompensated
- not getting the amount of damages they deserve and - more importantly – need.
Getting the discount rate right is of huge importance to
those with the most severe of injuries – those needing lifelong care. This is a
tiny minority of people and hardly a drain on the public purse. If the boot had
been on the other foot, and inflation was soaring, insurers would be demanding
the rate be increased so that injured people were not overcompensated and they
could save a bit more.
But inflation is not soaring - it is as flat as a pancake.
Returns that could have been earnt on gilts and investments have been slashed.
Rates obviously should go down as well as up, but until now there has been a reluctance
by the Government to reduce the rate, and clearly there has been stiff
opposition from the Association of British Insurers (ABI). Now the Lord
Chancellor has announced that the rate will go down, the insurers, and indeed
the government, will have to pay out more.
This is not ‘barking mad’ as some would imply. It is about
fairness to injured people, rather than reviewing rates only when it increases
the insurers’ advantage. We take out car insurance so that the most seriously
injured people on our roads get the care they deserve and are not left short
changed and do not run out of money. There is a cost to caring, but it is a
cost worth paying.