interest - new rate

We have been considering the rate of interest we award, where appropriate, in claims we uphold against insurers which are members of the Insurance Ombudsman Bureau.

At present, we add interest to all awards. Unless there is specific information about the particular costs the policyholder has incurred during the relevant period, we use a rate which is equivalent to rates for savings accounts.

An example where we would award a higher rate is where the policyholder has had to borrow money to buy replacement goods or has been charged interest by his lender for failing to meet insured loan payments.

The award is intended simply to recompense the policyholder for the fact that he has not had use of the money; it is not a penalty on the insurer. But if we find that, for example, the insurer’s delay in settling the claim has given rise to particular distress or inconvenience for the customer, then we may make a specific award to reflect this - over and above our standard rate of interest.

At present, we award interest in these circumstances at a rate of 6% per year compound (less tax if properly deductible). This is not straightforward for customers or firms to calculate and is out of line with the awards made in the courts and by other schemes in the Financial Ombudsman Service.

We have therefore concluded that a rate of 8% (simple) per annum, in line with the rate presently used in the County Court, would be more appropriate. We will use this rate in all awards made in the insurance division from 1 September 2001 onwards.