Discount rate change means fairer compensation for those seriously injured
As of 20th March 2017, the discount rate applied to compensation cases for future losses in England & Wales was lowered from 2.5% to minus 0.75%, with the Scottish government confirming Scotland will follow suit from 28th March 2017.
We welcome the change in the discount rate. Those impacted are amongst the most vulnerable in society. They have suffered life changing injuries which have, in many cases, rendered them seriously disabled. Their lives have changed beyond recognition. Changing the rate will benefit those most vulnerable and will impact the quality of their lives to ensure they are correctly compensated.
There has been a lot of press coverage regarding the change announced by the UK Government to the discount rate applying to personal injury damages and claims by the insurance industry about the impact it will have on premiums. Limited attention has been given to the people for which the change will prove to be life altering.
Compensation claims are intended to put an injured person into the position they would have been before the accident. We know that for many clients with spinal cord injury or brain injuries that any compensation received will never do that.
Without exception, all clients would much rather that they didn’t suffer a brain or spinal cord injury and have to pursue a personal injury claim.
The reality is though that they do because a compensation claim ensures they have future financial security and are able to pay for the care costs they will need in the future.
How are personal injury claims for future loss calculated?
Most personal injury claims are settled on a lump sum basis to include losses suffered to date and, where appropriate, losses that will be experienced in the future.
When calculating future losses, it is first necessary to obtain a figure for the present day value of the loss. In a wage loss claim, this would be a person’s net income. Thereafter, the present day value is multiplied to produce a lump sum for the period of the loss.
Assumed claimants will invest part of compensation
Currently, it is assumed that at least some of the compensation will be invested and it is assumed a claimant will obtain interest on the investment.
Due to the return they receive on the investment, this could lead to claimants being over compensated. In an attempt to combat this, a discount is applied when calculating future losses.
Discount rates meant to ensure claimants are not over compensated
The methodology was introduced a number of years ago. 16 years ago, in 2001, the rate was set at 2.5%.
Setting it at 2.5% reflected the rate of return at that time on UK government gilts over a three year average. UK government gilts are used because it is recognised that injured people are risk averse. Gilts are seen as a safe investment.
Why change the discount rate now?
Since the market crash, there has been a substantial reduction in the returns on index linked government gilts. It has long been thought that the rate of 2.5% was too high.
In November 2010, the Government first announced it would review the discount rate. Experience showed that the returns on investments in Gilts were not 2.5%, but lower. The government review makes that clear: a rate of return of 2.5% is too high. It has resulted in claimants for a number of years having their damages unfairly reduced.
Attempts to ask the courts to reduce the rate of return to be used have been unsuccessful.
Digby Brown argued discount rate was unfair for brain injury compensation case
In a previous case, Digby Brown acted for a man with a brain injury and argued that the discount rate was unfair based on the current return. Ultimately, the Court found that it was not for the Courts to change the rate of return. The question was a political one.
As the Government Minister, Lord Keen QC said recently, “the object of the change in the discount rate is to ensure that those who suffer catastrophic and life changing injuries are fully and properly compensated for those injuries.”
A reduction in the rate of return was the only option available to the Lord Chancellor. For a number of years, pursuers have been prejudiced whereas insurance companies have benefited from the rate being too high.
Taking account of the change in circumstances in the UK from March 2017, the discount rate will be minus 0.75%.
What impact will the change in discount rate have?
The reduction in the discount rate will mean that, in most cases, the value of future loss claims will increase. The change will not affect claims where no claim is made for a financial loss into the future.
Lord Chancellor, Liz Truss, said in her statement that “There will clearly be significant implications across the public and private sector.”
The insurance industry are aghast by the change. They have branded the change as “crazy”. They have stated the change will result in increased premiums for drivers.
It is important to remember though that this will benefit the most vulnerable and significantly injured people.
Many of these people who have suffered life changing injuries are young children who now face a life of challenges ahead of them as they cope with their injuries and disabilities.
Whilst undoubtedly the insurance industry will have to make adjustments, the importance of the change to seriously injured people should not be forgotten. It provides them with the security they need now and into the future.
Why the discount rate needed to change for the seriously injured
Mr A is 39 years old and suffered a spinal cord injury in an accident at work. He is tetraplegic and cannot use his arms. He is a permanent wheelchair user. He needs help with transfers to and from his chair. He is unable to control his bladder and bowel. He requires help for all activities of daily living. He cannot hold his children when they need comforted.
Mr A’s care package will cost £100,000 per year. Using the discount rate of 2.5% , the compensation recovered for care is only £2,686,000. Applying the new discount rate, the compensation recovered for care is £5,718,000. A difference of £3,032,000.
The money recovered by the insurance company of the negligent party will help ensure that, in his later years, Mr A is not left to choose between what care to provide.
He will not have to rely on the statutory services, and ultimately the taxpayer, to pay for his care costs. Due to limited resources, statutory services often do not meet the full needs of those most badly injured.
Scotland reduces discount rate from 28th March
The Scottish legal system is distinct from England. In the past, the rate was set by the Scottish Ministers as 2.5%, mirroring the rate set in England.
Following the announcement that England and Wales were lowering the discount rate, the Association of Personal Injury Lawyers (APIL) asked the Scottish Ministers to confirm their intentions. They confirmed on 27th March that they will follow the rate set by the UK Government taking effect from 28th March 2017.
This means injured pursuers in Scotland are now in the same position as their counterparts south of the border and claimants no longer risk being undercompensated in Scotland.
Will the discount rate change again?
From the announcement from the UK Government, it seems likely. A further consultation is planned to start in April, which is of course a month after the new rate is introduced. Since the announcement, the Chancellor of the Exchequer has met members of the insurance industry.
It appears that there is a greater impetus from the UK Government to act now than there has been since the first consultation was announced in 2010.
In any further discussion on changes, it is vital that claimants are represented. After all, the use of the discount rate is to compensate those seriously injured as a result of accidents.
For too long, claimants have been undercompensated. The change now fully and properly compensates them for their injuries. The opportunity of change should be used to ensure that those with serious injuries are not prejudiced again.