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Consequences of UK discount rate change for personal injury compensation

Read time: 6 minutes

In March 2017 the new discount rate, to be applied to personal injury compensation, became effective. The discount rate dropped dramatically from 2.5% to -0.75%. In this blog we discuss the backgrounds of the change, the potentially massive consequences for claims reserves and the options for a fairer framework.

The discount rate for personal injury compensation is used in the adjustment of damages paid to seriously injured individuals for future losses. This reflects that damages received in advance are to be invested to generate a return on investment. The discount rate determines the level of discount to be applied, based on the return that an individual may reasonably achieve from such an investment. As a result, over-compensation should be prevented.

 

Decision to change the rate

The rate had remained the same (2.5%) since it was last updated in 2001. The new figure of -0.75% is based on the three-year rate of return yielded by Index Linked Gilts (ILGs) *. This suggests that Claimants are ‘risk averse’ investors and ignores the fact that a Claimant would not invest only in ILGs.

* Index Linked Gilts are government bonds, linked to the Retail Prices Index

 

Consequences for ‘future losses’

Such a huge reduction had not been anticipated by insurers. The discount rate reduction will dramatically increase damages awarded to any Claimants receiving an award for future losses. Of course, this does not affect only the motor and personal injury market but also e.g. the National Health Service (NHS). In fact, any party that may be held liable for personal injury.

Depending on the Claimant’s life expectancy, the discount rate change will increase future loss awards dramatically. For a Claimant with a life expectancy of a further 15-30 years, the increase in future loss awards may reach 30%. In case of a life expectancy of a further 30-50 years, this may even rise to 50%.

 

Periodical payments or lump-sum awards

Another consequence of the change concerns a likely change in the attitude of the Claimant. As a result of the increase in future loss awards, Claimants may prefer to opt for lump-sum awards, rather than periodical payments. This change particularly concerns the NHS and other public authorities funding the majority of high-value claims by periodical payments. As to the insurance market, insurers’ profits are being affected and premiums may rise. This may well undo the Whiplash claims reforms, which were to lead to reduced claims costs and premiums…

 

Discount rate under review: a fairer framework?

It appears the, in its post-consultation response, the Ministry of Justice (MoJ) accepts that the new rate of -0.75% overcompensates personal injury Claimants. The assumptions as to how Claimants invest are unrealistic and may produce significantly larger awards. To amend the current legislation, new legislation will be introduced and should result in a rate within the range of 0% to 1%. This rate, however, will not operate retrospectively and the introduction of the change is unlikely to be introduced until sometime in 2019. It should be noted that the Scottish parliament is required to introduce separate legislation to change the discount rate in Scotland.

 

Personal injury compensation: options under current law

In the meantime, Claimants will, benefit from higher awards or possibly over-compensation. Claimant solicitors will be pushing for cases to be listed for Trial before any change is introduced.

It should be borne in mind, however, that UK Courts already have discretion under Subsection 1(2) of the Damages Act 1996 to take a different (discount) rate of return into account “if any party to the proceedings shows that it is more appropriate in the case in question”. In practice, the most suitable opportunity for a different rate is likely to be when the Claimant lives and receives care outside the UK. The Claimant will be investing lump-sum, future loss, compensation payments locally.

Additionally, in view of the expected reforms, both Claimants and Insurers have an opportunity in the negotiation process of a claim to attempt to obtain agreements based on a rate within the 0% – 1% range, regardless of the current -0.75% rate.

Further developments and strategies will be keenly followed in the coming months and will be posted here.

Depending on the Claimant’s life expectancy, the discount rate will increase future loss awards dramatically
Paul Lavelle

Forward thinking

Get the latest news and industry thoughts from Van Ameyde. With 75 years’ experience, you can count on our insights and knowledge to help you ensure your continuing success.  More articles

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