The Lord Chancellor David Gauke angered insurers this week with his decision to continue to set a negative personal injury discount rate of minus 0.25% as from the 05 August 2019.
The discount rate is very important when assessing future damages in a personal injury case.
When the Court calculates future losses, it has to apply a multiplier to allow for the Claimant’s life expectancy. The starting point is the “usual” life expectancy taken from standard life tables, which then have to be adjusted to allow for a number of factors including the rate of interest a Claimant would expect to earn by investing the money as well as the effects of tax, expenses and inflation on these returns.
In the past, it has always been assumed that the Claimant would invest their damages and receive an income above inflation. The assumption had been that the return would have been 2.5% above inflation. This was adjusted in March 2017 to minus 0.75% as the Court assumed that the Claimant would put their money into a financial product which may fall in value by this amount over a period of time.
This figure has now been adjusted to minus 0.25% so it continues to be a negative rate.
The insurers have been quick to complain that the rate did not go far enough, even though this adjustment to minus 0.25% could bring them savings of between £230m and £300m according to the Government’s own impact assessment.
For example, if a victim in their 30s is awarded £50,000.00 annual compensation for their loss of earnings and the cost of care over their lifetime, they would see their payout reduced from £2.94m to £2.6m, a cut of £340,000.00.
Although we do not welcome any reduction in the damages payable to a Claimant, this adjustment is less than we anticipated. The insurers had been lobbying the Government for the rate to go to between 0% to 1% which would have had a much greater impact on the damages awarded to Claimants.
The discount rate is reviewed every 5 years. A higher discount rate is better for insurers but worse for accident victims.