The change in the discount rate: an opportunity missed?

The Lord Chancellor has today announced the result of the discount rate review under the Civil Liability Act 2018. From 5 August 2019, the discount…

The Lord Chancellor has today announced the result of the discount rate review under the Civil Liability Act 2018. From 5 August 2019, the discount rate will increase from -0.75% to -0.25%.

The new rate is based upon the premise that claimants are to be treated as “low risk” investors and financially dependent on their damages for long periods of time. In announcing the change, the Lord Chancellor has specifically stated that he considered the following:-

  • Actual returns available to investors.
  • Actual investments made by investors of relevant damages.
  • Such allowances for tax, inflation and investment management costs as thought appropriate and,
  • Wider economic factors.

The next discount rate review will take place in five years time following the new legislative methodology. Future reviews will be conducted using an expert panel, specifically established for the review.

What will this mean in practice?

There will be a fall in the level of damages on high value claims, but damages will continue to be uplifted for accelerated receipt. This is based upon the erroneous assumption that a claimant will choose to invest their damages in a way that means they will lose money. The reality is very different.

The reluctance of claimants to accept periodical payment orders is unlikely to change whilst lump sum settlements remain so attractive.

What should defendants do now?

  1. Review all reserves to ensure they remain adequate.
  2. Do not settle claims now unless the claimants’ solicitors are prepared to do so on the basis of a discount rate of -0.25%.
  3. Review all existing Part 36 offers. As a matter of urgency, defendants should review and consider withdrawing any Part 36 offer calculated on the basis of a -0.75% discount rate.
  4. Review and amend any existing counter schedules.

The future

Defendants have to accept that a negative discount rate will remain the norm for the foreseeable future.

Government Actuaries have actually provided an analysis of dual rates. This would involve a lower short term rate following by a higher long term rate after a “switch over” period. The Lord Chancellor seems to be quite interested in this but there remains a lack of quantity and depth of evidence at the present time. However, it is possible that we will see a dual rate on the next review in five years time.

More information should be available and a further update produced once the Lord Chancellor has produced his full statement of reasons and impact assessment.

Comment

This is an opportunity missed by the Lord Chancellor. Excessive damages awards will continue to have a significant impact on insurance premiums and the public purse. It is regrettable that this review does not reflect the reality of how claimants choose to invest their damages.

If you have any questions or would like to know more about our legal update, please contact Dave Cottam, Partner on 0116 242 8924 or by email dave.cottam@weightmans.com

 

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