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Discount Rate Shock

  • United Kingdom
  • Litigation and dispute management
  • Personal injury claims litigation - Claims e-briefing

27-02-2017

Discount rate has today been reduced from 2.5% to minus 0.75%.

Substantial increases in damages for future loss will follow. The extent of change had not been predicted.

What is the Discount Rate?

The discount rate which governs the calculation of future losses in personal injury claims has been reduced from 2.5% to minus 0.75%. Although this sounds like a technical change it will have massive consequences for the level of damages paid out for future losses from now on.

The discount rate is the assumed rate of return that injured Claimants can get on their damages if they invest it in very low risk government stock, taking into account things such as inflation and tax.

It was fixed at 2.5% in 2001 and has not changed since. The rest of the world has moved on however and real rates of return on those investments have lagged behind the assumed 2.5% almost from the time it was set 16 years ago.

The Government, which sets the discount rate, has been slow to act in reviewing the level at which it should be fixed, partially at least as it is one of the UK’s major compensators through the NHS. It was finally forced to do so following proceedings for judicial review of its failure to act brought by the Association of Personal Injury Lawyers (APIL).

How much will the change cost?

It is suggested that the change will increase the cost of claims to the NHS by £1 billion per year and road traffic claims are predicted to increase by £700 million.

The announcement today that the rate will be reduced to minus 0.75% has come as a shock to the insurance industry, legal commentators and probably even APIL itself. From now on the assumption will be that damages that are invested will shrink at the rate of 0.75% each year rather than grow by 2.5%.

The impact on the level of damages in claims where there are future losses will increase, in some cases dramatically, as a result.

By way of example, a 30 year old man earning £20,000 who is injured and will not work again would be awarded £415,688 using a discount rate of 2.5%. But that is now very much yesterday’s calculation. Applying a discount rate of minus 0.75 to the same scenario would now result in award of £704,522, an increase of £290,000 or about 70%.

Claims for lifetime care in the most serious of cases will be even more affected by the change.

So what should you do?

The news of this change will spread quickly and claimant lawyers are almost certainly already recalculating their schedules of future loss and thinking of reasons to adjourn trials or settlement meetings that are due to take place prior to the official implementation date of 21st March. It is very unlikely, however, that any large claim will settle between now and then on the basis of a future loss calculation set under the 2.5% rate.

There is a short window in which you may be able to accept Pt 36 offers (particularly those made less than 21 days ago which cannot be withdrawn without the court’s consent) where they have been calculated on the basis of the “old” multiplier. But otherwise it is a case of reviewing your existing cases and making sure that you have sufficient reserves for the increased level of damages that will be awarded.

We will be reviewing the cases that we are dealing with and advising clients of any change necessary to the reserve or strategy on a case by case basis.

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