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The Actuary The magazine of the Institute & Faculty of Actuaries

UK's discount rate raised to -0.25%

The rate used by UK insurers to calculate compensation for serious personal injury claims has been increased after concerns were raised that victims receive too much.

"Bad outcome" for insurance customers ©iStock

The Ministry of Justice announced yesterday that it would raise the discount rate from -0.75% to -0.25% following advice from insurers, investment experts and lawyers.

It said this would provide a “more balanced approach” to compensation, with the new rate coming into force on 5 August before being reviewed again within five years.

Justice Secretary, David Gauke, said: “It is vital victims of life-changing injuries receive correct compensation – this is the most balanced and fair approach following an extensive consultation.

“It is also right that the rate is informed by experts and reviewed on a regular basis to make sure this important calculation is accurate every time.”

The discount rate is supposed to reflect the interest that victims can expect to earn by investing compensation, as well as the effects of tax, expenses and inflation on these returns.

Compensation awards using the rate aim to put claimants in the same financial position they had been in before they were injured, including loss of future earnings and care costs.

The rate was cut dramatically from 2.5% to -0.75% in early 2017, which caused insurers to warn of higher motor premiums for customers due to greater compensation costs.

Higher compensation costs can also put significant pressure on public services with large personal injury liabilities, particularly the NHS.

Although yesterday’s hike to the discount rate will reverse some of the pressure, the Association of British Insurers (ABI) argued that it does not go far enough.

Director general, Huw Evans, said that a negative rate ”maintains the fiction” that claimants knowingly choose to invest in a way that guarantees them losing money.

“This is a bad outcome for insurance customers and taxpayers that will add costs rather than save customers money," he continued.

"This will remain the lowest discount rate in the Western world, leaving England and Wales an international outlier at a time when we need to boost our attraction to international capital." 

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