Discount rate of -0.25% comes into effect

Justice minister and lord chancellor David Gauke has set the personal injury discount rate at -0.25%.

The new -0.25% rate will be in place for up to five years. An expert panel will conduct the next review.

The discount rate change follows a review as provided in the Civil Liability Act. It was previously set at -0.75 in 2017.

The Civil Liability Act 2018 mandated that claimants must be treated as ‘low risk’ investors, and that a review of the current discount rate be carried out with several factors in mind, including actual returns available to and investments of damages made by investors.

A consultation on the discount rate, giving interested parties the opportunity to inform government thinking, closed at the end of January.

Gauke said: “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.”

“It is also right that the rate is informed by experts and reviewed on a regular basis to make sure this important calculation is accurate every time.”

Mixed reaction

Initial reaction to the new rate has been mixed. David Nichols, chief claims officer at Zurich, expressed his disappointment, saying: “Despite a lengthy engagement with the insurance sector on how to achieve a balanced rate, we are greatly disappointed with today’s announcement of a -0.25% rate.”

He continued: “It’s essential that claimants get the compensation they are entitled to following an injury. However, the government’s failure to change the discount rate to a balanced level will only serve to increase the cost and, therefore, affordability of certain types of insurance.”

“This rate is likely to reduce both market coverage and affordability for higher risk customers such as road hauliers, commercial fleets, young drivers and older drivers. It will also have a financial impact on public liability cover for the public sector and businesses.”

Simon Kayll, chief executive at the Medical Protection Society, echoed this sentiment: “While we welcome this improvement, we are disappointed that it is not a more significant increase.”

“The new rate announced today does not come close to the rate of 2.5% that was in place between 2001 and early 2017. We therefore expect that the cost of clinical negligence will remain very challenging for the public purse, the NHS, doctors and the wider economy.”

Association of Personal Injury Lawyers president Gordon Dalyell backed the UK government’s decision to set the rate at -0.25%, “after uncertainty about the impact of the government’s new approach of setting the rate on the basis that injured people should be considered ‘low risk’ investors”.

He said: “The government has faced sustained pressure from the insurance industry to set a rate which would not be appropriate for injured people, who should not be forced to take any risk with their investments. We must remain vigilant that this new rate does provide them with the fair compensation they need and deserve.”

Gauke ‘to be congratulated’ for resisting pressure

Ben Posford, head of the catastrophic injury at London law firm Osbornes Law, agreed that the lord chancellor had done well to resist pressure to set a higher rate. He said: “David Gauke is to be congratulated for resisting pressure from the insurance lobby to set a higher rate than this, which would simply have increased insurers’ profits at the expense of badly injured people.”

“Investing damages that are needed to provide for an injured person is difficult at the best of times, and given the state of interest rates—which are likely to fall further in the event of a no-deal Brexit in particular—there was no justification for raising the discount rate any higher.”

Mark Burton, the Kennedys partner who led the firm’s work on the discount rate, commented: “Today’s announcement by the lord chancellor confounds market predictions of a positive rate and risks continuing overcompensation.”

“It is to be hoped that the lord chancellor’s statement of reasons offers meaningful transparency to compensators about the real-world net returns achieved by properly-advised claimants from investing in a low-risk mixed portfolio, considering the significance of that data to the review outcome.”

Burton added: “From a claims-handling perspective, parties can at least now engage with more certainty during the next five-year review cycle. Practitioners deserve a lot of praise for the creative ways in which they have continued to settle cases whilst awaiting a resolution. The new statutory process of regular reviews should ensure that the market does not experience similar disruption again.”