PI discount rate reset: A fair and balanced approach?

The Lord Chancellor David Gauke announced today that the personal injury discount rate will soon be reset at -0.25% after carrying out a review which was required under the Civil Liability Act 2018. The new discount rate will be applicable from 5 August 2019.

David Gauke stated that “it is vital that victims of life changing injuries receive the correct compensation” adding “I am certain this is the most balanced and fair approach following an extensive consultation”.[1] However, insurers are questioning whether the new rate is actually balanced and fair, particularly in light of the government stating that amendments to the rate would reflect the common law principle of 100% compensation.

The rate was last reviewed in February 2017 when it was changed from 2.5% to -0.75%. The change to -0.75% caused controversy at the time.

The Civil Liability Act 2018 has imposed an obligation on the Lord Chancellor to review the discount rate again within the next five years. In the future an expert panel will be instructed to review the rate to ensure that it is appropriate.

What is the Ogden discount rate?

The discount rate is a calculation used to assess how much a claimant should be awarded in a lump sum to assist them for the rest of their lives. It reflects the return the claimant would expect to receive if they invested their money.

What this means in practice?

Ella works as a nursery nurse in a local infant’s school. Her current salary is £20,000 per annum. For the past two years she has suffered from migraines and dizzy spells. Despite raising this at numerous doctors’ appointments her symptoms are overlooked and in August 2019 Ella collapses following a seizure. Following this it is discovered that Ella has two brain tumours she is unable to continue working.

When considering Ella’s loss of earnings up until her retirement at 65, the application of the current and proposed discount rate highlights the difference the change can make in terms of immediate capital contributions for insurers and the compensation recovered by claimants. Under the current discount rate that would result in a low of around £785,000; as of 5 August 2019 the award would be around £719,000.

What does this mean for insurers?

The change has come as a disappointment for insurers as it was anticipated that the rate would rise to between 0% – 1%.[2]

LV’s general insurance claims director, Martin Milliner, expressed his view that the change failed to meet his expectations, stating that “at this level we believe that claimants will remain overcompensated thus undermining the common law principle of 100% compensation”[3].

Chief of Zurich, David Nichols, echoed this sentiment saying that the firm is “greatly disappointed” in the amended rate, warning that the change will have an impact on the affordability and cover available to higher risk customers such as young drivers or the elderly.

What does this mean for the NHS?

Chief executive of the Medical Protection Society, Simon Kayll, warned that the change did not go far enough meaning that the cost of clinical negligence claims will remain a challenge for the NHS. Despite this, Mr Kayll praised the speed at which this area of the law has been reformed but called for a more robust approach to addressing the cost of clinical negligence claims.

Conclusion

Although it can be seen that those in the insurance industry do not believe that the rates have been adjusted sufficiently to ensure that claimants are receiving appropriate compensation, this decision at least brings certainty to this key issue for the next few years.

The Civil Liability Act 2018 has imposed an obligation on the Lord Chancellor to review the discount rate again within the next five years, perhaps providing an opportunity to address the concerns of those in the insurance industry.

[1] The Financial Times, Discount Rate Reset Comes as a Blow for UK Insurers, accessed 15.07.19

[2] City AM, Insurers voice disappointment as UK changes personal injury discount rate, accessed 15 July 2019

[3] Ibid


Disclaimer

This briefing is for guidance purposes only. RadcliffesLeBrasseur accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.