11 September 2017 | Comment | Article by Ciaran McCabe

Change in Discount Rates Brings Uncertainty for Claimants

The Ministry of Justice have today announced that draft legislation will be submitted to increase the discount rate used to calculate personal injury and clinical negligence awards where there is a future loss element.  This follows less than six months after the last change, when the rate was lowered from 2.5% to -0.75% which was welcomed at the time, after a long period of campaigning, by Claimants and those representing them in catastrophic injury litigation.

The discount rate, which is used to calculate the amount deducted from an injured person’s compensation to account for any income they may receive from investing their damages was set at 2.5% in 2001, and is based on yields generated by index-linked government stock. A lower discount rate requires insurers to make larger lump sum payments on personal injury claims, as it assumes lower annual investment returns for that lump sum. Therefore, this proposed rise in the discount rate will mean lower lump sum payments in catastrophic personal injury and clinical negligence claims for those who are dependent on these settlements.

The previous decision in February 2017 by Liz Truss the then Lord Chancellor was met with outcry from the insurance industry and has led to a government review.

The Ministry of Justice announcement on 7 September stated “Based on the evidence currently available, the government would expect that if a single rate were set today under the new approach, the real rate might fall within the range of 0 to 1 percent.”

This swift government U -turn brought about by pressure from the insurance industry lobby, will potentially impact on those who have sustained life changing injuries through no fault of their own. It will also lead to a long period of uncertainty for both them and their families, which is not to be welcomed.

These are individuals who have sustained life changing injuries to their brain or spinal cord and babies who have sustained birth related injuries. The outcome of this decision will impact upon the rest of their lives. Their needs should be viewed as equally important as the annual profits of insurance companies or the impact on the public purse. It is argued that the savings the insurance industry will make as a result of this decision will be passed directly onto the consumer in terms of reduced insurance premiums; I would be very surprised if this were the case.

The concerns of those representing claimants, that they may now be undercompensated because of this decision, have not seriously been considered, which is very worrying.  The view has been reached it would seem, without adequate supporting financial evidence, that currently Claimants are being overcompensated. There is no real evidence to support such a broad brush assertion by the Lord Chancellor David Lidington and the Ministry of Justice. In addition, changing the long held assumption that the claimant should be viewed as a “low risk” rather than a “very low risk” investor in uncertain economic times is a dangerous path to follow.  If a claimant receives a settlement as a lump sum it has to last them a lifetime and pay for all their needs including accommodation , care and even their food. This decision may possibly lead to protection being sought against such increased investment risk in the form of Periodical Payment Orders by Claimants.

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