Discount Means Car Insurance Up

Discount Means Car Insurance Up.

Shock waves have been felt through the insurance industry today with the announcement that the Ministry of Justice is to make changes to how compensation payments of worked out.

If you are injured as a result of a road traffic accident, that was not your fault, it is possible that compensation will be paid to you for your injuries. In some cases the injuries that you suffer may have a lasting effect on your life such as:

• Permanent pain
• Permanent disability
• Restrict your job opportunities and earnings prospects
• Even reducing your life expectancy

In cases where your injuries will affect you for many years to come or possibly for the rest of your life it is usual that a Personal Injury Settlement is made and in many cases, particularly if you are now disabled, a Personal Injury Trust is established.

Personal injury settlements can run into not just thousands of pounds but hundreds of thousands of pounds and even millions of pounds (particularly if injuries are permanent or your life expectancy is impacted).

Injury Compensation

As part of the settlement, the insurance company paying the claim is allowed to use a "discount" factor. This is an assumption made as to future investment performance on your compensation. For example, if it is worked out that overall you will need £3 million to support you for the rest of your life, the compensation settlement may be lower than this because you will have much of the money and used in bank accounts or investments for the coming years i.e. you will receive growth on your investments over the years which will cross subsidise the amount needed to support you each year. This is the investment "discount" factor.

Investment Discount

The current investment discount is set by the Ministry of Justice at 2.5% per annum. This means that when calculating compensation payments, insurers are allowed to assume a future growth rate on your investments of 2.5% per annum. With effect from 20 March 2017 the Ministry of Justice is reducing the investment "discount" to minus 0.75%.

This means that the Ministry of Justice are assuming that the buying power of your money will actually reduce over the years rather than achieving a real investment return over inflation of 2.5% per annum.

This means that compensation payments with regard to long-term Personal Injury Settlements will be dramatically higher.

The ABI has predicted that this will increase the costs of motor insurance for all motorists by around £75 per year but could be hundreds if not thousands more for young drivers.

Comment

It is right that the Ministry of Justice reviews the investment discount down given low inflation but equally, a financial adviser to the Personal Injury Settlement could simply go a invest money in Gilts (government borrowing) and get secured returns of around 2% per year or even buy a simple annuity.  Indeed some of the settlement could be invested in Index Linked Gilts to provide for future inflation protection.  A negative investment return figure of minus 0.75% pa is a little harsh we fear.