Why Admiral are wrong on the discount rate
If the costs of claims really are increasing, then drivers must accept higher premiums as a price for motoring, writes Jonathan Wheeler
The reduction in the discount rate has been described as 'unnecessarily extreme' and 'eccentric' by the chiefs of Admiral Insurance. The government is consulting on a further change, and Admiral is agitating for an increase. This is special pleading on behalf of the insurance industry; we need to step back and take a wider view.
The reduction in the rate may well have an effect on insurers' bottom line. If the value of some claims will significantly increase, then the stock industry response is to shrug and say that premiums will have to rise. Do not be fooled into thinking that Admiral is a lobbyist for their put-upon customers; all motor insurers benefit from operating in a captive market because if anyone wants to drive a car, they must have insurance.
The real issue here is that Admiral and others have benefitted from a system which has under-compensated claimants for years. Claimants awarded compensation for future losses such as lost earnings, the cost of care and accommodation, benefit from 'accelerated receipt' of those damages '“ they get the money for those losses before the loss is suffered. As a result, they are expected to invest that money and their award is discounted to factor in the assumed rate of return on those investments (the 'discount rate'). Ever since Wells v Wells, that investment must be 'without risk' as the damages have to last, and so index-linked government stocks (ILGS) are the benchmark.
The last time the rate had been reviewed was 2001. While the government was lobbied, threatened, and cajoled to change it since 2008, it consistently failed to do so. This meant that claimants' damages were calculated on the basis that they could invest them and receive a return of 2.5 per cent per annum, when '“ in view of the financial crash '“ ILGS yields were a fraction of that. Some claimants were forced to invest in more risky stocks to make their compensation last. Insurers are now dripping poison into ministers' ears, raising the possibility that claimants are speculating with their awards, getting even greater returns, and profiteering from their injuries at the expense of insurers' shareholders.
In deciding to act, the then Lord Chancellor, Liz Truss, had no option other than to set the discount rate at the current average ILGS rate of -0.75 per cent. If this goes up, and damages claimed from insurers do not fully compensate claimants, it is tax payers who will ultimately have to foot the bill: when the money runs out early, a claimant's needs are shouldered by the NHS, local authority care, and the welfare benefits system.
As a society, we should ensure that road accident victims injured through no fault of their own are fully compensated. If the costs of claims really are increasing overall (and we should not just take insurers' word for that), then drivers must accept higher premiums as a price for motoring '“ but do shop around on those wonderful comparison sites for the best deal.
Jonathan Wheeler is managing partner at Bolt Burdon Kemp