Discount rate decision set to deliver premium decrease for motorists

Insurers and experts have welcomed news of a 0.75% increase in the personal injury discount rate (PIDR), with predictions that it will likely to lead to premium reductions.

The rate is a percentage figure applicable to personal injury damages that takes account of victims’ future losses and expenses.

Government’s decision to increase the rate has led to experts predicting that it should reduce motor premiums for consumers by as much as 5%.

Courts must consider this government-set rate when awarding lump sum compensation for future financial losses in personal injury cases in England and Wales.

For the past five years, the discount rate has been -0.25%. It had been adjusted from 2017’s rate of -0.75%. Previously, the discount rate had been 2.5% since 2001.

In a statement released today (2 December 2024), Lord Chancellor Shabana Mahmood, secretary of state for justice, said: “Later today, I will lay a statutory instrument in Parliament that will change the discount rate applicable to personal injury lump sum compensation payments to the new figure of 0.5%. This rate will be effective as of 11 January 2025.”

The announcement mirrors a similar decision for Scotland and Northern Ireland made in September this year.

Rate environment

The statutory interest rate, reviewed and set by the government once every five years, is calculated based on the investment returns a claimant could generate from investing a compensation payment over a lifetime.

Experts said the interest rate environment has changed dramatically since 2019, meaning claimants should see the same returns now from investing a smaller lump sum as they would have done five years ago with a larger sum.

PwC welcomed the decision to adjust the rate, predicting that the increase was likely to see motor insurance premiums fall. Actuaries from PwC estimated that premiums would decrease by an average of £50 for drivers in England and Wales.

Mohammad Khan, head of general insurance at PwC UK, commented: “The increase of the personal injury discount rate by 0.75% to 0.5% in England and Wales – matching the personal injury discount rate announced earlier this year for Scotland and Northern Ireland – should bring some consistency to aspects of how motor insurance premiums and payouts are calculated across the UK.

“This change is good news for drivers as it will further intensify the competitiveness of the motor insurance market. Motor insurance premiums have risen by over 20% over the last two years but the direction of travel has been turning and these amounts are starting to reduce. We estimate premium rates will fall by 5% – about £50 for the average motor insurance policy.

“As for the insurance companies, they had expected a change of this scale and will already be pricing it into their pricing.”

Good all round

The decision was also welcomed by Matthew Maxwell Scott, executive director at the Association of Consumer Support Organisations (ACSO), who said the rate decision was one that benefitted both sides of the court’s award.

He explained: “The Lord Chancellor has sensibly erred on the side of caution and, in doing so, makes it less likely that the 100% compensation principle will be broken.

“In resisting siren voices calling for a much higher rate, she has done the right thing by seriously injured people while also ensuring that costs to compensators are kept under control.”

Jon Dye, director of underwriting for motor at QBE Insurance, said the decision was a positive but that issues still remained.

He said: “We welcome the PIDR review and the move announced today to align the rate with more recent economic conditions and the rates recently announced by Scotland and Northern Ireland.

”Whilst this rate is still likely to result in some claimants being overcompensated, this movement is positive news for consumers and business and will help negate the continued upward pressure on the cost of serious bodily injury claims, including increasing care cost at c+9-12%.”

Despite the general positive reception from the insurance industry and consumer organisations, personal injury lawyers hit out at the decision, noting that it will leave more victims unable to afford the necessary care.

Gordon Dalyell, treasurer of the Association of Personal Injury Lawyers (APIL), explained: “This is a crucial decision which has far-reaching consequences for injured victims of negligence.

“People with catastrophic injuries are particularly susceptible to the rising costs of living we’re seeing across the board, which includes increases to carer wages and the cost of specialist aids and equipment, for example. We’ll be interested to see the Lord Chancellor’s statement of reasons so we can assess how she has come to the conclusion of a 0.5 per cent personal injury discount rate for England and Wales.”