In March 2017, the discount rate to be applied for calculating compensation awards for personal injury claims in England & Wales was reduced from 2.5% to minus 0.75%. This caused consternation from a number of quarters, including the insurance industry.
It is not easy to determine the level of damages to be awarded in cases where there are long-term effects from a wrongful injury. In these cases, lump sums are often awarded for the claimant’s future losses. Such losses might include future earnings, pension losses and the cost of medical treatment and care. To ensure that the claimant is fully but not overly compensated for his or her losses, the lump sum needs to be adjusted to take into account various factors including the possibility that a claimant may invest the damages. This is achieved by applying a ‘discount rate’.
The latest reduction in the discount rate is likely to have a significant impact on defendants and their insurers. This is because firstly, it is likely to mean that there will be an increase in damages being awarded to all claimants with future losses. In addition, it may mean that claimants will seek a one-off lump sum payment rather than the ‘periodical payments’ which were previously often favoured. These provide a guaranteed annual income for the claimant and cover ongoing care and treatment.
The benefit of periodical payments for defendants and their insurers is that they spread financial liabilities over a period of time. An increase in damages will mean that insurers will likely need to adjust their claims reserves. If there is a trend towards claimants opting for lump sum rather than periodical payments for high value claims, this will also have an effect on insurers’ cash flow.
The reaction to the announcement is no real surprise when considered in this context. It has led to a call to consider the way the rate is set to ensure that it is fit for purpose; properly compensating the claimant but also fair to businesses. As a result, a further consultation is underway to gather evidence as to how claimants invest awards of damages and the use of periodical payment orders, and obtain views as to how to ensure that the system for setting the discount rates is better and fairer.
If you would like to have your say, you have until 11 May 2017 to provide your views. The relevant information can be found via this link https://consult.justice.gov.uk/digital-communications/personal-injury-discount-rate/.