Personal Injury: Discount Rate Policy Explained
Back in March of this year (2017), the Ministry of Justice (MOJ) changed the discount rate in personal injury claims from 2.5 per cent to minus 0.75 per cent.
Unchanged since 2001, this adjustment worked in favour of claimants, but wasn’t met favourably by insurers, who are now paying out more in compensation as a result. A consultation was set up to establish how the discount rate should be set in the future.
The consultation paper ‘The Personal Injury Discount Rate: How it should be set in future’ was published on 30 March 2017, jointly by the Ministry of Justice and the Scottish Government. The core issues being addressed are:
- What principles should guide how the rate is set?
- How often should the rate be set?
- Who should set the discount rate?
So, what is the discount rate, why was it changed, how will it be set in the future, and how does it affect those making personal injury claims?
What is the discount rate?
The discount rate is a calculation used by the courts to determine how much insurance companies should pay out to claimants in cases of life-changing injury.
When a person is injured and wins a personal injury claim they usually end up with a lump sum. Compensation in a personal injury claim is calculated to cover any costs involved with the recovery of injuries and any required life-long care. The sum is intended to put the injured person in the same financial position they would have been in had they not been injured, and so includes loss of earnings, as well as treatment and future care costs.
The claimant is expected to invest lump sum compensation money and receive a return, so the discount rate adjusts compensation pay-outs to account for this expected return on investment. It is a calculation used by justice systems all over the world.
Who sets the discount rate?
The discount rate is set by the Lord Chancellor/Ministry of Justice.
What determines the discount rate?
The discount rate is linked by Law on the lowest risk investments, typically Index-linked Gilts, or government bonds. The fact that this assumes claimants would only invest their compensation in Index Linked Government Securities (ILGS) is currently being challenged by the insurance industry as factually and legally wrong.
Why was the discount rate changed?
Back in March 2017, the discount rate was changed largely because of the drop in value of Index-Linked-Government Stocks (ILGS). The rate then was 2.5 per cent and had remained unchanged since 2001. The percentage rate of minus 0.75 per cent was set to account for future losses.
How does it affect those paying out personal injury compensation?
The change in the discount rate has attracted strong criticism from the insurance industry. In a recent Telegraph report Huw Evans, the director general of the Association of British Insurers and a former Downing Street special adviser, commented that “the -0.75pc rate would be a bigger hit to insurers’ finances than all of the flooding in the North of England put together.”
UK insurers have been lobbying government to make a U-turn on the -0.75 per cent rate. Lord Chancellor, David Lidington, has suggested the rate should fall between 0 and 1 per cent in a new system to be reviewed every three years. This news has been welcomed by the insurance industry.
In response to recent changes to the discount policy, the Law Society are positive that a regular review of the discount rate, now to be taken by the MOJ every three years, will benefit both claimants and defendants.
An Independent panel of experts will be appointed to help the lord chancellor review the discount rate in three years’ time. Speaking to the Law Society Gazette, Joe Egan, president of the Law Society, welcomed the pledge to review the rate regularly and to bring in independent experts. The Law Society are also urging the government to continue to research claimant investment behaviour to confirm existing base assumptions.
Main image by Sarah Rose.
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