You are here

Lord Chancellor cuts personal injury discount rate

Insurers warn of soaring claims costs and motor premiums following ‘crazy’ decision

27 February 2017

Add comment

The Lord Chancellor has announced changes to personal injury compensation payments by lowering the discount rate from 2.5 per cent to -0.75 per cent.

In finalising compensation awards, courts apply the discount rate calculation with the percentage linked in law to returns on the lowest risk investments – typically index linked gilts.

Today’s decision by Liz Truss is the first time the rate has been changed since 2001. The new rate will come into effect on 20 March.

‘The law is absolutely clear – as Lord Chancellor, I must make sure the right rate is set to compensate claimants,’ said Truss. ‘I am clear that this is the only legally acceptable rate I can set.’

As well as seeing compensation payments rise, the decision is also likely to have a significant impact on the insurance industry and the NHS.

Announcing the rate change to the London Stock Exchange this morning, the government said it was committed to ensuring the NHS Litigation Authority has appropriate funding to cover changes to hospitals’ clinical negligence costs.

Moreover, the Department of Health will work closely with GPs and medical defence organisations to ensure that appropriate funding is available to meet additional costs to GPs, such as increases to professional indemnity insurance.

A consultation will be launched before Easter to consider a ‘better or fairer’ framework for claimants and defendants, with necessary legislation to be introduced at an early stage.

The consultation will consider whether the rate should in future be set by an independent body; whether more frequent reviews would improve predictability and certainty; and whether the methodology is appropriate for the future.

The government also confirmed that the chancellor, Philip Hammond, will meet representatives of the insurance industry to assess the impact of the rate adjustment.

‘This is hugely significant. It could double some damages awards,’ said Bill Braithwaite QC, who specialises in medical negligence and personal injury claims.

‘For someone in their twenties, lump sum damages would change from £4.8m to £11m. For someone in their sixties, where it impacts less, lump sum damages would change from £3.8m to £6.5m.’

Daniel Frieze, head of personal injury at St John’s Buildings, said the new rate was a positive development for claimants, but warned the change could also lead to insurers arguing for the implementation of fixed costs, which the government has already championed in recent weeks.

‘When it comes to insurance, the new burden placed on them by this announcement, as well as recent caps by the Ministry of Justice to whiplash and personal injury claims, means that premiums are set to be more expensive,’ he said. ‘In particular, the £40 rebate on car insurance is at risk, as many insurers may be unable to guarantee this going forward.’

While the new discount rate welcomed by claimant lawyers who were left frustrated by government reforms unveiled in last week’s Prisons and Courts Bill, the insurance industry has decried the change.

Huw Evans, director general of the Association of British Insurers, said the decision was ‘crazy’, arguing it will lead to soaring claims costs and an inevitable increase in motor premiums.

‘We estimate that up to 36 million individual and business motor insurance policies could be affected in order to over-compensate a few thousand claimants a year,’ he said. ‘To make such a significant change to the rate using a broken formula is reckless in the extreme, and shows an utter disregard for the impact this will have on consumers, businesses, and the wider operation of the insurance market.

‘We have repeatedly warned the government that this could lead to very significant price rises, with younger drivers in particular likely to find it much harder to get affordable insurance. It is also a massive own goal that lands the NHS with a likely £1bn hike in compensation bills when it needs it the least.’

The ABI director general also called on the MoJ to ‘commit to alternatives immediately so changes to the law can be included in the Prison and Courts Bill’.

However, in a statement released this morning, the Association of Personal Injury lawyers said insurance companies have ‘saved millions of pounds in unpaid compensation, have been aware that a decision to change the discount rate has been on the cards for six years’.

‘They have had plenty of time to prepare for this change and the fact that many are now saying premiums will have to rise to cover the cost simply beggars belief.’

The president of the Forum of Insurance Lawyers, Nigel Teasdale, unsurprisingly did not agree with his counterparts, saying that to reduce the rate to such a low level was ‘extremely concerning’ and had ‘all the hallmarks of a rushed decision’.

‘The government’s current approach seems disjointed at best. On the one hand suggesting that saving the average consumer money on their insurance premium is a priority, then on the other reducing the discount rate which will have a major inflationary effect on premiums now and for many years to come.

‘The timing is wrong given the uncertainty in the market, and the decision also fails to reflect how people actually invest their compensation. The reality is that when paid large amounts of money in a lump sum most claimants will invest in a range of assets through an independent financial adviser.’

Teasdale said there needed to be reform so that the rate reflected ‘the real world’, rather than index linked government securities that are rarely used in practice.

‘The most likely outcome in addition to increasing premiums is a return to a more adversarial system of litigation where major heads of damage will be challenged.’

Solicitor Christopher Malla said such a drastic cut will have a massive impact on the value of the most serious claims – adding 30 per cent to the future loss element of catastrophic injury cases, and 50 per cent to high-value clinical negligence claims involving children.

The Kennedys partner also warned of significant delays in current cases as claimants withdraw part 36 offers to settle.

‘This is not about denying injured people the compensation they need,’ said Malla. ‘At the same time, claimants should not be over-compensated, especially when it is public bodies, such as the NHS and local authorities, which are paying.’

John van der Luit-Drummond is deputy editor of Solicitors Journal

john.vanderluit@solicitorsjournal.co.uk | @JvdLD

Categorised in:

Personal injury Clinical negligence

Tagged in:

Association of British Insurers Association of Personal Injury Lawyers FOIL discount rate