A Guide to Changes for Personal Injury Pay-outs: Implications for Car Insurance
The Government has recently committed to two big changes to personal injury payments, both of which will have huge effects on the insurance industry as a whole. Motor insurers (and their policy holders) are likely to be particularly affected, with implications for future insurance costs. These two changes are reforms for whiplash claims and a reduction in the discount rate for large personal injury pay-outs.
Whiplash Reforms: Why Make Changes?
It is undoubtable that something had to be done to stem the tide of personal injury claims being made in the aftermath of minor car accidents. In the past 10 years, whiplash claims have increased by 50%, in spite of roads becoming safer and an overall decrease in the number of accidents.[i] Typing into a search engine; “Whiplash Claims”, results in a huge array of advertisements for easy ways to gain money following an accident. Top page adverts state “Claim for Whiplash. 30 Seconds Claim Calculator” and “Suffered Whiplash? Find out what you could claim.” Aggressive advertising, including phone calls and e-mails encourage people to make claims following accidents. There have even been reports of criminal gangs instigating crashes in order to submit claims for whiplash. The Association of British Insurers states that a review found that in 2014, insurance investigations uncovered £835 million of dishonest motor insurance fraud across the industry.
Whiplash Reforms: An Overview
With figures for whiplash getting out of control, the Ministry of Justice, with upcoming reforms, is now striving to bring figures down to a manageable amount with fraudulent claims much more difficult to make. At the same time, of course, they are keen to ensure that accident victims suffering genuine injuries have recourse to compensation swiftly and easily.
The MoJ has announced plans to increase the fixed amount that can be claimed for personal injury in the small claims court. This measure may appear counter-intuitive to the aim of reducing costs associated with whiplash claims. However, these reforms mean that (with medical evidence) a claim can be made simply – potentially without the need to hire a solicitor, reducing legal costs. Eager to make false claims more difficult to make, the MoJ has set out new stipulations that medical evidence must be supplied before any settlement is offered or pursued. Their document states; “now the Government intends to ban offers to settle [Road Traffic Accident] related whiplash claims without medical evidence. The ban will cover both the offering and requesting of such settlements”
The changes they have made could see a decrease in pay-outs; a benefit which the government hopes to see passed on to consumers. Around 18 months ago, when these moves were initially presented, Chancellor George Osborne suggested that these reforms “will remove over £1bn from the cost of providing motor insurance. We expect the industry to pass on this saving, so motorists see an average saving of £40-50 per year off their insurance bills.”
Discount Rate Decrease
However, the second big change to personal injury claims is likely to see a price hike that will at least off-set the reduction, or even increase premiums. The government has made a change to the discount rate for large compensation packages. This is the first change in 16 years, and it has seen the discount rate fall from 2.5% to -0.75%.
What is a discount rate?
When calculating compensation designed to cover losses and pay for care across a person’s lifetime, the “discount rate” takes into account the fact that the bulk of that money can be placed into a high interest savings account (or stocks and shares if the person is willing to take that risk). Therefore, a discount of 2.5% was settled upon in 2001 to allow for the income from those investments. However, with interest rates so low and the understanding that the accident victim should not be expected to take risks with their compensation money, the discount has been reduced to a minus. When announcing her decision, Lord Chancellor Elizabeth Truss explained; “The law makes clear that claimants must be treated as risk averse investors, reflecting the fact that they are financially dependent on this lump sum, often for long periods or the duration of their life.”
With the huge sums involved in critical personal injury claims, as well as the fact that these pay-outs are made for decades of care and treatment, this percentage difference can result in an increase of anything from thousands to millions of pounds for a single case – and perhaps billions of pounds to the insurance industry overall. While, by all means, motor insurance will not be the only type of insurance needing to raise premiums as a result, it would appear that motor insurance costs are certainly set to increase because of this.
These two changes may have knock on effects that result in additional costs. Ian Hughes, of Consumer Intelligence, suggests that the need for insurance companies to explain any price change is likely to see an increase in costs for call centres, with “the costs of running [call centres rising] as call lengths increase, and satisfaction levels for both customers and staff go down.”
[vi] In addition the government has recently declared a change to Insurance Premium tax which will have some cost implications.
With so many different variables in the mix, in terms of establishing the impact on our car insurance costs; it appears that for now, we’ll have to wait and see.
[i] Gov.uk. 2016. New crackdown on whiplash claims set to cut insurance premiums - GOV.UK. [ONLINE] Available at: https://www.gov.uk/government/news/new-crackdown-on-whiplash-claims-set-to-cut-insurance-premiums. [Accessed 29 April 2017].
[ii] ABI. 2017. You could not make up Savings honest customers insurers expose 3 6 million worth insurance frauds ABI. [ONLINE] Available at: https://www.abi.org.uk/news/news-articles/2015/07/you-could-not-make-up-savings-honest-customers-insurers-expose-3-6-million-worth-insurance-frauds/. [Accessed 29 April 2017].
[iii] z, Ministry Of Justice , Feb 2017. Part 1 of the Government Response to: Reforming the Soft Tissue Injury (‘whiplash’) Claims Process: A consultation on arrangements concerning personal injury claims in England and Wales. Pg 34.
[iv] Law Society Gazette. 2017. Spending review: Osborne raises PI small claims limit to £5k | News | Law Society Gazette. [ONLINE] Available at: https://www.lawgazette.co.uk/news/spending-review-osborne-raises-pi-small-claims-limit-to-5k/5052389.article. [Accessed 27 April 2017].
[v] Gov.uk. 2017. New discount rate for personal injury claims announced - GOV.UK. [ONLINE] Available at: https://www.gov.uk/government/news/new-discount-rate-for-personal-injury-claims-announced. [Accessed 27 April 2017].
[vi] Chris Seekings. 2017. ‘Crazy’ discount rate cut could cost insurers £3bn. [ONLINE] Available at: http://www.theactuary.com/news/2017/02/crazy-discount-rate-cut-could-cost-insurers-3bn/. [Accessed 27 April 2017].