As has been widely reported by now, the Lord Chancellor has set a new statutory discount rate under the Damages Act 1996, to be implemented when calculating damages for future loss, due to come into effect on 20 March. The new rate will apply to all settlements and judgements after that date.
The Damages Act 1996 was intended to determine the sum awarded as damages for future pecuniary losses in claims involving personal injury. There are various elements to this Act, such as provisional damages and periodical payments. Section 1 of this Act sets out the implementation of the discount rate, which is to be prescribed by the Lord Chancellor and has been fixed at 2.5% since 2001 so one could say it was long overdue a review. The point of the discount rate is to take into account the income a lump sum of damages may produce before it was spent by a claimant, such as for instance, interest. The idea of course is to place claimants back into the position they were in prior to the incident – neither better nor worse. Thus, earning income on the lump sum of damages would put claimants in a better position. The discount is there to subtract the income from the lump sum figure, therefore preserving Common Law principles.
The new rate to be applied is -0.75%, which is a significant reduction from the previous figure and has understandably caused considerable alarm amongst insurers and the ABI in general, whom fear that the new rate will result in gross overcompensation for claimants, bringing about soaring claims costs, which as a consequence will lead to an increase in insurance premiums. \
The current concern by the ABI when discussing insurance premiums seems focused on motor policies but one must pay closer consideration to the impact this deduction could have for Liability policies – both Employers and Public, as well policies for Medical Malpractice. The fact remains currently that we simply cannot anticipate the overall bearing this will have on Liability policies at this point in time but it would be prudent for insurers to perhaps consider their rates at the earliest opportunity in preparation for what may come.
Likewise with insurance premiums, it is difficult to predict the effect the new rate will have on a special damages claim but in an effort to provide an understanding at least, a couple of examples are below:
A 35 year old female, educated to degree level, with no disabilities, has a loss of earnings of £30,000 p.a. up to retirement at age 60.
Using Table 8 of the Ogden Tables, the previous discount rate of 2.5% would have produced an initial multiplier 18.43. Application of a Table C adjustment of 0.89, would leave a final multiplier of 16.40. The loss of earnings here would have been £492,000.
Applying the new discount rate, the initial multiplier would be 27.10. Again with a Table C adjustment of 0.89, leaves a final multiplier of 24.11. This produces a much larger lost earnings figure of £723,300 – a 47% increase.
On the lower end of the scale, an injured employee will likely require surgery at a cost of £2,500 in 10 years’ time.
The new discount rate results in a multiplier of 1.0782 meaning the claimant will recover £2,695.50 – a 31.5% increase.
These are no small percentages and they seem to be averaging anywhere from 30% – 50% in increases, which seems to support the ABI’s trepidations over soaring claims costs.
In conclusion it seems fair to say that the new discount rate of -0.75% is simply too drastic a drop, without, it seems, the Lord Chancellor paying any proper attention to current interest rates and the state of the economic position. Insurers should take this time before the rate comes into effect to thoroughly review files that are likely to be affected and consider whether their reserves require any adjustment. Think carefully about any adjustment made to a reserve as the difference could be dramatic. Proper consideration should also be given to any Part 36 Offer made by claimants that perhaps seemed high at first thought but maybe now seems like a bargain. Equally insurers should consider putting attractive offers to claimants early in a bid to settle, again, before the new rate comes into effect.
Finally, if there is one positive to take from all this, it is that the new rate can be seen as only an ‘interim’ one right now, as a further consultation is due to commence before Easter with a view to considering the discount rate once again. With any luck the Lord Chancellor will reconsider and a more realistic rate will be implemented. It is pretty clear that we cannot expect a return to the old rate but one that properly reflects the current times is not too much to ask for. Until this consultation however, we must ride the wave of the new rate and brace ourselves for what seems to be an inevitable increased claims spend, at least we can hope, until Easter time.
For more information please contact Mark Exley, Senior Claims Assessor