Insurance premiums are expected to go up following a landmark High Court judgment yesterday that rewrites the formula for how judges calculate compensation for victims of injuries.
Mr Justice Mohan Bharwaney ruled personal injury plaintiffs should receive a higher lump sum payout for future losses. The Court of First Instance judge found a long-held assumption that such claimants could make a 4.5 per cent return - over inflation - on payouts that were invested was no longer valid.
The assumption, dating to a 1979 English precedent, had led the courts to deduct the expected return from the amount of compensation to avoid overpayment. The assumption was upheld by the Court of Appeal in 1996.
Bharwaney decided the 4.5 per cent rate should be lowered to reflect the downturn in the economic landscape over the past decade, where investment returns were lower and inflation was higher.
But he noted: "There is no denying that the costs of insurance will go up as a result of this judgment."
The revised formula applies only to calculation of damages for future losses, which cover loss of earning capacity and medical expenses.
The judge decided that claimants whose financial needs in the future, as relating to the injury, did not extend past five years should have their payout increased by 0.5 per cent, rather than lowering it by 4.5 per cent.
Those victims whose needs extend beyond five years but which are less than 10 will have their award lowered by 1 per cent. Claimants with needs extending more than 10 years will see their payouts lowered by 2.5 per cent.
Bharwaney's judgment came after Britain's Privy Council made a similar ruling in March last year. The discount rate currently prevailing in Britain is 2.5 per cent.
Lawmaker Chan Kin-por of the insurance sector said the ruling would posed a significant financial impact on insurers.
"Insurance companies will need to reserve more money for the extra payout. That will directly affect their cash flow. The impact will be significant," Chan said.