Government increases the personal injury discount rate – so why are the Insurers unhappy?
You could be forgiven for having missed possibly the most important government announcement of the past few weeks (no, not that one!). Forgiven, that is, unless you are a personal injury solicitor, or you work for an insurance company.
In one of his last acts before resigning as the justice Secretary, David Gauke announced that the new discount rate that will apply to personal injury lump sum payments for future losses, is to be set at minus 0.25% as of the 5th August. The current rate is minus 0.75%.
If you are scratching your head and about to click the exit button, please give me just a minute or so to explain why this, in all seriousness, was an important announcement.
What is the personal injury discount rate?
It is pretty much accepted by everyone, we trust, that if someone suffers personal injury in an accident that wasn’t their fault, then the person who caused the accident (or as in most cases, their insurance company) should compensate the person injured – the claimant. That is particularly so, we would venture to suggest, in cases where the claimant has suffered catastrophic or life-changing injuries.
The whole idea behind awarding someone personal injury compensation for injury and losses sustained, as a result of an accident caused by another person’s negligence, is that the injured party, as much as possible, is to be put back into the position that they were in before the accident. At Mooneerams solicitors, we believe that in terms of life-changing injuries, it is somewhat trite to talk about any amount of money being able to compensate for the horrendous injuries and loss of previous life, that these types of claims involve for the affected claimant.
However, as seriously injured persons cannot be put back into the physical state that they were in before the accident, the next best means of compensation is by ensuring that they receive enough money to enable them to have the best future care and medical attention as possible and for them to have enough money to live on.
Claims of this nature will often include, as part of the settlement, either at court or by agreement between the parties to the claim, a lump sum for future losses, costs and expenses. Such losses are likely to include sums to compensate for future loss of earnings, medical fees and perhaps care fees. These sums can often add up to considerable amounts.
The personal injury discount rate is a percentage that is used to adjust the future losses lump sum, so as to take into account the amount of interest that claimants could expect to earn by investing their lump sum (as well as taking into account the effects of inflation on the award of damages).
It is the government that decides what rate should be set.
Currently the rate is minus 0.75%. Whilst small minus percentages might sound neither ‘here, nor there’ in terms of amount, when used in what is quite a complex calculation to determine the amount to be deducted from compensation, they can result in a large sums of money being deducted from the claimants lump sum .
As of the 5th August this year the rate will change to minus 0.25%, as mentioned previously. From that date any personal injury claims that include a lump sum for future loss claims, will fall to be dealt with under the new discount rate.
How do the government work out what a discount rate should be?
Rather than focusing on the actual, complicated calculations that they use, it is probably easier to outline what they are trying to achieve when working out the discount rate. The idea, or the theory at least, is that when someone has been involved in an accident and makes a claim for personal injury compensation, then assuming that the claimant was in no way to blame, they should receive 100% of the compensation they could possible get, for the type of injury and losses that they have suffered – no more, no less.
When claimants receive what may be a considerable lump sum for future losses, it is intended to cover those future losses for a specific period. In many serious cases, that may well be for the rest of the claimant’s life. As such, the intention is that the lump sum will only be ‘eaten into’ gradually, year on year.
It is therefore assumed that the person in receipt of the lump sum, will invest the money and will receive interest on that sum. Depending on the interest rates applicable at any given time, interest may build up to be a reasonable sum. At the time of writing, the Bank of England’s interest rate stands at 0.75%, but over a period of 10 or 20 years, this is likely to change many times.
The discount rate is intended to produce a reduced amount of lump sum compensation that is as near equal as possible to the interest the claimant will receive over the coming years on having invested his lump sum. In fixing the rate, the aim is to take into account, that the claimant will opt for a safe investment vehicle (if he invests his sum at all) producing lower investment yields as opposed to opting for an investment, with potentially higher returns, but also with greater risks to his initial investment.
Has the change in the discount rate made all parties happy?
No. It has, in fact, made the party that you might expect to be pleased with the new interest rate, the insurance industry, rather angry. On the other hand, claimant solicitors, if not deliriously happy, are at least somewhat relieved.
The reason that claimant solicitors have responded with a sense of relief is that the indication from the government was that the rate might have been increased to as much as 1.00 percent. As of the 5th August, claimants will not suffer as big a deduction from any lump sum for future losses, as they would have done had the rate been fixed between 0 and 1.00 percent. Nevertheless, the new rate is still an increased rate and will have a detrimental effect on affected claimants compensation awards. Hence the reason that their solicitors are not popping open the champagne corks.
Why are the insurers so unhappy?
Not only had they expected the rate to rise considerably more than it did, they had in effect already banked on it doing so. Now they will have to set aside more money than expected for lump sum payments. The news agency Reuters, said that this will;
“potentially (dent) their profits and (push) up driver’s premiums.”
Reuters also quoted Huw Williams, Director General of the Association of British Insurers, as saying;
“This will remain the lowest discount rate in the Western world, leaving England and Wales an international outlier at a time when we need to boost our attraction to international capital.”
Although the fixing of the discount rate only affects the more serious types of personal injury claim, i.e. those where the injured claimant has been left with life changing injuries, the rate at which it is fixed can have a huge bearing on the amount of future loss compensation that the insurance company is required to pay.
If the rate is fixed at a percentage that assumes the claimant will make high interest gains from investing his lump sum in a high risk scheme, then the reality is likely to be that the claimant will not in fact be compensated on a 100% basis, because he is unlikely to earn the anticipated amount of interest on the lump sum to make up the shortfall.
It is worth pointing out that high settlement cases attract the compensation awards that they do, because the claimant has been left with very severe injuries indeed.
The negative response of the insurers is interesting, but not unexpected. In recent years the government has been very receptive to most suggestions that the insurance industry have urged them to adopt – recovery of fixed costs only in many smaller personal injury cases, fixed costs in higher value personal injury cases to be introduced on April 2020, pushing claimants down the road of trying to do their own claims online and more. All of this with the promise that car insurance premiums will be reduced as a result. Have you noticed your insurance premiums going down over the past couple of years?
Now, for the first time in recent history, the government have gone against their wishes and announced a discount rate that will be less favourable to them, than they the insurers wanted, nay, demanded. Immediately their response has been that insurance premiums are likely to rise as a result. This despite the fact, remember, that the discount rate will go up from minus 0.75 percent to minus 0.25 percent, thus meaning that they will save millions of pounds as a result – up to £320 million every year, if the Law Society Gazette is to be believed.
Perhaps rubbing salt into the wounds of the Insurers, the government has made it clear that it expects the insurers to reflect the savings that the new discount will bring to their coffers by reducing insurance premiums.
Expect this story to rumble on. It is highly unlikely that the Insurers will take this lying down and will seek a review of David Gauke’s decision, possibly in early course, as a result of a new Lord Chancellor being appointed by a new Prime Minister!
Alistair Worth is the Managing Director of Mooneerams Solicitors, specialist personal injury solicitors. Alistair is based in the Cardiff office. Mooneerams also have offices in Aberdare, Caerphilly, Rhondda, Pontypridd and Bridgend. Alistair was born in the area and has lived locally all his life. He cares passionately about the local community, both business and social.
Mooneerams are active supporters of many grassroots projects in the region. You can contact Alistair and his team on 029 2048 3615 or use this contact form to email us.
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Alistair was one of the founding partners of Mooneerams solicitors in 2002. He has specialised in personal injury law since qualifying in 1997.