Reducing discount rate 'will up premiums'

Scrapping the discount rate will lead to increased premiums for customers, lawyers warned today.

The warning comes in the wake of APIL's decision to launch a judicial review to force Chancellor Lord Ken Clarke into a decision on whether to trim the discount rate.

Insures are bitterly opposed to trimming the discount rate for lump sum payments. Insurers get a discount rate on paying a lump sum to counter the fact that claimants get investment returns from their payments, although low interest rates are putting pressure on change.

An ABI spokesman warned: "We are not aware of any evidence that clients are being under compensated. If the discount rate was reduced, it could have an impact on all customers."

David Holt, head of the large loss and technical claims unit at national law firm Weightmans LLP, said: “Insurers are opposed to any reduction in the discount rate. Even a modest reduction will add £millions to the overall compensation payouts by insurers and this will ultimately be borne by individual policyholders in the form of increased premium payments.

“The level of compensation in the UK is already the highest in Europe and there is evidence that claims inflation is running well ahead of inflation, even with the current discount rate of 2.5% in place. There is no substantive evidence that claimants are being undercompensated.

“Moreover, it is believed that seriously injured claimants do not invest either solely or even primarily in ILGS and hence the appropriate discount rate should not depend solely upon returns on ILGS (especially not in the current economic conditions). Independent financial advisors will typically advise seriously injured claimants to invest in a basket of gilts and equities. If what happens in practice is not to rely on ILGS, then the discount rate should not be based upon yields from ILGS.

“Importantly, the courts have for some years now had the power to award index linked periodical payments (even if one or both parties object) for recurring losses. Such payments are tax free and inflation proof.

“Ultimately, compensators should pay fair and proportionate compensation, not more nor less. Current compensation levels in the UK more than achieve this.

“It is essential that the Lord Chancellor has all the relevant information before him when he considers his position. This should include an understanding of how seriously injured Claimants actually invest their compensation.”