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What next for the Discount Rate?

23 November 2017

The discount rate remains at minus 0.75% since the reduction in February 2017. However, with the consultation complete, the rate is thankfully expected to increase at some point in 2018.

It is probably fair to say that the reduction in the discount rate from 2.5% to minus 0.75% was not the most popular decision made by Liz Truss in her role as Lord Chancellor, though it is certainly one of the most memorable...

The discount rate is applied to future losses on lump sum payments for personal injury cases, usually where there are catastrophic injuries and very high awards. The amount of money awarded in compensation is discounted to reflect the amount of interest that capital should gain when it is (in theory) invested by the claimant.

Needless to say, the reduction of the rate in February dramatically changed the amount of compensation that a claimant would receive. To give an example, a 35-year old female claimant with loss of earnings of £12k a year would have previously received £196,800 under the old rate, but would now receive approximately £289,320 using the new rate.

With payments set to increase significantly, it's unsurprising that insurers labelled the reduction 'crazy' and marched down to Downing Street to meet with Philip Hammond within 24 hours of the announcement. Continued lobbying from the market, and other organisations and bodies adversely affected. In an extreme case of the right hand not knowing what the left hand was doing, the Justice Department appear to have been unaware of the massive impact on the NHS – which joined in the lobbying. All this resulted in a promise of a Government Consultation to consider how the rate would be set in the future.

The consultation has now been completed and a report is anticipated imminently. Rumours have been flying around that the new rate will be set at between 0-1%.

'But when will that be?' many of you may be pondering… The short answer is: no one is entirely sure.

Justice Minister Lord Keen announced in early November that the new discount rate can be expected to take effect in early 2018, only for the Ministry of Justice to backtrack on this statement almost immediately, calling it "too ambitious" although changes would come as soon as possible, within the constraints of parliamentary procedure...

Parliamentary procedure is notoriously time-consuming, especially where controversial issues arise, and therefore it seems that the original forecasts are correct in predicting that the new rate will not be introduced until late 2018. This would be logical as wider personal injury reforms are also expected to come into effect at that time. More pessimistic reports suggest that the new rate may not be introduced until early 2019.

Ultimately, the new rate should be more positive for the insurance market, whenever it is eventually implemented. The new discount rate is intended to better reflect "the actual investment habits of claimants" according to the Ministry of Justice: investment methods will be treated as 'low risk' rather than 'very low risk', and therefore compensation payments will be reduced.

Insurers will be pleased to know that there are some silver linings in the darkness of the Ogden tables. Previous Part 36 offers may now seem more attractive as offers still stand if they have not been formally withdrawn, PPOs may now be a more attractive option, and it may be advisable to fight battles on contributory negligence and liability more robustly than before, in the hope of agreeing a settlement offer which is close to what the final sum might have been if the rate were 0-1%. And we can expect to see some procrastination in finalising settlements, by defendants waiting for the new rate!

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