What is the Personal Injury Discount Rate?
The discount rate is used to calculate lump sum damages to be paid for future losses in fatal and serious injury claims. Its purpose is to take into account investment income a claimant might earn on a large award of damages. The intention is that by a mixture of draw down and investment income the sum awarded will be exhausted at the end of the loss period. This is achieved by reducing the number of years by which the annual loss is multiplied to calculate the damages – that reduced number of years is well known as the “multiplier”. The aim is that the claimant should be in the same financial position as if they had not been injured.
The discount rate is linked to returns on the lower risk investments, less allowances for inflation, tax and investment expenses. The lower the discount rate, the higher the multiplier and, in turn, the higher the award of damages.
What was the previous rate and why -0.25%?
Since 2001, the discount rate had been 2.5% but it was cut to -0.75% in 2017 to reflect the lower investment returns available on Index Linked Government Securities, used at that time as the benchmark for setting the rate. The new rate has been set for the first time on a new basis and process introduced by the Civil Liability Act 2018 which also saw a new benchmark for the type of portfolio and risk to be used when setting the rate. Nevertheless a negative rate has been arrived at due to deductions for inflation, tax and expense from an assumed return of CPI + 2%, and with a further reduction by the Lord Chancellor to reduce the risk of under compensation.
Why has this change been made?
The Ministry of Justice settled upon this change following calls to amend the rate from the insurance industry.
Former Justice Secretary David Gauke believes that the rate is correct, stating that:
"It is vital victims of life-changing injuries receive the correct compensation – I am certain this is the most balanced and fair approach following an extensive consultation."
While the increase is an improvement from 2017’s change, the general consensus from the insurance industry is that it is still too low, resulting in significant financial pressure on insurers. In addition to this, by setting a negative rate it assumes that the average person investing their compensation award will make a loss doing so.
Here’s how the new rate could impact claims
In the following table we show the difference between multipliers at a -0.75% discount rate versus the 0.25% discount rate and also the impact on claims costs for every £100k of future loss.
Table show comparision of -0.75% and -0.25% multipliers: Table 1 Male, and impact per every £100k pa future loss.
|Age||Life Expectancy||-0.75%||-0.25%||Reduced Multiplier||% reduction multiplayer -0.75 v -0.25||Reduced cost of £100k pa. -0.75% v -0.25%|
The reality is that comparing the new rate to the old one indicates a reduction in damages and hence claims costs. Few settlements were reached at the old rate of -0.75%, pending the outcome of the review and expectations were of a much higher rate. However, when compared to claims costs under the previous 2.5% rate, applicable still only a few years ago, current claims costs have become and remain very much higher in a short space of time.
How could this effect your business?
In short, the change in rate means that you may still need to review your indemnity levels to check that you are insured for the correct level of potential losses, particularly if you could be exposed to multiple claimant events. This is especially vital if your limits were not reviewed when the Person Injury Discount Rate was changed in 2017, as prior to this the rate had been static for 16 years.
Mike Constanti, senior claims officer at Gallagher, has voiced concerns that this could leave organisations underinsured:
"Many businesses have not changed their Employers’ & Public Liability Limits of Indemnity for many years, and although the Ogden Rate changes have a major impact on claim settlements, businesses have not necessarily increased their policy limits to reflect the new regime. Unfortunately, this means that companies are often operating with inadequate limits which leave them exposed to uninsured loss that could threaten their existence. If you haven’t amended your Employers’ & Public Liability Limits of Indemnity since 2017, it is almost certainly worth reviewing your risk and taking expert advice."
To find out more, you can read the Government announcement. If you wish to check your indemnity limits are correct and that your business has not been left exposed to uninsured losses in the wake of the rate change, please get in touch with your usual Gallagher representative.