Weightmans statement: changes in the discount rate for personal injury claims
The Ministry of Justice has announced plans to cut the discount rate from 2.5% to -0.75%.
On Monday 27 February, the Ministry of Justice announced plans to cut the discount rate – a calculation used to determine lump sum compensation to claimants who have suffered life-changing injuries - from 2.5% to -0.75%.
David Johnson, Partner at Weightmans LLP said:
“This is a decision that will drastically increase the size of lump-sum payments across the scale of serious personal injury cases.
“Each individual case will be affected differently by this change. However, taking the example of a £9m case, of which £8.2m relates to future losses and expenses, the new discount rate of -0.75% would more than double the value of the claim to a cost of just over £20m.
“For those who compensate these claims, the annual claims outlay will potentially increase by tens of millions of pounds as a result of this change. This obviously affects insurers but also organisations including the armed forces and the Motor Insurers’ Bureau, which is liable for claims against uninsured drivers.
“Ultimately, these increased costs will be funded by policyholders and already overstretched public finances.
“It’s suprising that this radical change has been made in the absence of any meaningful studies into how damages are typically invested and the rates of return they can expect to receive. The rate of 2.5 per cent, set in 2001, was based on returns generated by index-linked government stocks, but in reality that is not how the vast majority of claimants choose to invest the damages they are awarded – and that needs to be understood if we are to identify a fair rate.
“The Ministry of Justice is yet to address the question of whether the way in which the discount rate is calculated is still fit for purpose and relevant.
“Of course, the Lord Chancellor is obliged to keep the discount rate under review, so it will likely increase again if economic conditions improve. However, it’s not possible to say with any certainty what level of improvement would be required for that to happen.”