The discount rate is something that is used to make it easier to calculate future losses in personal injury and fatal accident claims. When someone dies those who are finical dependent on the deceased can make a claim and receive a lump sum for the money the deceased would have contributed in the future had they not died. When the Courts assess this future compensation they need to take into account how much interest the lump sum will earn when it is put in the bank.
The discount rate is designed to work out how much interest money will earn and discount the lump sum accordingly to avoid over compensating a claimant. This means the higher the discount rate the more the lump sum is reduced. Recently the discount rate has been reduced from +2.5% to -0.75%. This change has had a significant effect because the lower discount rate means higher compensation for claimants for future loss claims.
This change has sparked a divide between claimants and defendants. Claimants are of course in favour of the change because it is argued that interest rates are so low that money in the bank was never earning the level of interest necessary to reflect the level of discount made.
The moral argument here was that it meant claimants who were dependent on the benefit of that lump sum to last them for the rest of their life were not receiving adequate compensation. The change to the rate, which came into force on 20th March 2017, has been welcomed by claimants. Conversely, large insurance companies, on behalf of Defendants, attempted to challenge the change in the High Court, where they lost.
The main thrust of the argument against the change is that insurance companies will have their eye watering profit margins reduced. Direct Line for example have stated that a reduction to the discount rate of 1% would see £190 million wiped off of their profit.
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