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Discount Rate lowered to minus 0.75%

On 27 February 2017 the Lord Chancellor and Secretary of State for Justice announced that she would be reducing the discount rate from 2.5% to…

On 27 February 2017 the Lord Chancellor and Secretary of State for Justice, Liz Truss, announced to the London Stock Market that she would be reducing the discount rate from 2.5% to minus 0.75%. The new rate will apply from 20 March 2017.

The discount rate is the mechanism by which damages paid to seriously injured individuals in relation to future losses are adjusted to reflect the fact of early receipt. The courts apply the discount rate to damages in order to take account of (a) the possibility that the claimant may die sooner than anticipated, and (b) the fact that the claimant will receive the damages in advance of incurring the expenditure to which they relate allowing the claimant the opportunity to invest the income. The discount rate has remained at 2.5% since it was last varied in 2001.

The Lord Chancellor is obliged to keep the discount rate under review in line with the provisions of s.1 Damages Act 1996 and, in accordance with this duty, Liz Truss announced her decision to reduce the rate to minus 0.75%. This reduction will lead to significantly higher damages awards where claims for future loss are advanced and will also directly impact the government in respect of litigation against it which is predominantly funded by the government itself.

The move is significant, and insurers are already suggesting that this could cost the industry £4.5 billion in additional claims spend. By way of example, a catastrophic claim that today would settle for £9m, could now settle for over £20m when the new discount rate comes into force.

The announcement is likely to eradicate, in one fell swoop, any potential savings which would have been passed onto consumers following the wider personal injury reforms.

On current claims where future losses are sought, claims handlers should review the adequacy of reserves as well as existing offers. The potential increase in the value of these claims now may also warrant looking at handling authority matrices to ensure that claims which will now inevitably be worth more are handled by the correct people.

However, there could be light at the end of the tunnel. On 28 February 2017, CEOs from most major insurers met with the Chancellor of the Exchequer to discuss the situation. The government as a result has promised to urgently consult on both the rate and the method used to set it. What remains to be seen is whether the implementation date for the new rate will be put on hold pending the outcome of the urgent consultation.