Any business owners may have missed or thought that there was no significance to their business of the recent announcement by the Lord Chancellor reducing the personal injury discount rate from 2.5% to minus 0.75%, effective 20 March 2017.
However, the change is so significant that it will affect all individuals and businesses by increasing insurance premiums for both motor and liability covers. The irony following recently announced changes to the small claims limit – intended to lower insurance premiums – has not gone unnoticed.
The discount rate determines how compensation payments are adjusted to reflect the interest Claimants can expect to earn by investing that compensation. When an injured person is awarded damages, the aim of the law is to put them back into the same financial position they would have been in, had they not been injured.
A discount rate has always been applied to claims for future loss (eg future loss of earnings, cost of care and medical treatment), to avoid Claimants potentially being over compensated, given the potential investment return on a lump sum award.
The calculation of the discount assumes the Claimant is risk-averse and is linked in law to returns on the lowest risk investments (usually Index Linked Gilts). The rate had been set at 2.5% in 2001 but in recent years, with interest rates so low, there have been calls for the discount rate to be lowered.
The Lord Chancellor accepted the reduction would have “significant implications across the public and private sector” and in particular for the NHS with the Government ensuring the NHS Litigation Authority has appropriate funds to cover negligence claims.
The discount rate cut will have a massive impact on the injury market – dramatically increasing damages awarded to all Claimants receiving future loss awards. The NHS, public authorities and insurers now face huge increases compensation awards in catastrophic personal injury and high value clinical negligence claims.
The higher the life expectancy of a Claimant, the greater the impact of the discount rate reduction on the increase in the Claimant’s damages. Depending on the age and future life expectancy of the Claimant, the discount rate cut to minus 0.75% could increase the majority of future loss awards from 30% to over 100% The higher the future loss element of an award, the greater the impact on the total damages.
Just 24 hours after the announcement, 15 Insurer CEO’s met with the Chancellor to voice their concern of the pressure on insurance premiums. As the announcement affects not only future claims but also existing claims awaiting settlement, some major insurers immediately increased rates on the back of the decision and have also had to prop up reserves by more than £100M. The government has opened a six-week consultation on how the personal injury discount rate should be set in the future.
This article was written jointly by Kelvin Farmaner and Tony Knight.
Kelvin Farmaner is a Partner with Trethowans Solicitors and Tony Knight is a Director of Knightsure Insurance Brokers.