Government ruling could increase insurance premiums

Following recently announced changes, the cost of insurance in both England and Wales could increase dramatically.

The changes concern something called “the discount rate” and will affect any insurance policy where an injury can occur.

What is the discount rate?

In the event of an injury which prevents the claimant from working again, a lump sum compensation payment will be awarded.  This is intended to handle future earnings which can now no longer be earned.

The compensation is reduced by the value of the discount rate, which is the assumed rate of return on investing the lump-sum.  The higher the rate, the lower the initial lump sum needs to be, and vice versa.

The discount rate was set at 2.5%, meaning that insurers expected you to be able to earn 2.5% from investments over time.  The rate has now been dropped significantly to -0.75%.  This means insurers now expect you to lose money on investments!!

What does that mean for premiums?

The decision to reduce the discount rate will undoubtably increase costs for insurers.  They in turn will likely pass on some of these costs to UK policyholders.

Employers’ liability, motor insurance (personal and commercial) and healthcare insurance are most likely to be affected.  This is because these include a high proportion of long-term injury claims.

For more information, and examples of how the rate changes affects various lump sum payouts, please click here to read an excellent article from Locktons Companies Ltd.

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Discount Rate Graph