You may have read recently that your motor insurance premiums are going to soar as a result of the increase in the “discount rate”. However, I imagine that unless you, or someone close to you, has been involved in a horrific accident and received an award for damages to fund future care costs, you will not be overly familiar with the term.
The discount rate is applied to lump-sum payments in personal injury cases for future losses. Generally, upon conclusion of a case, the claimant can choose to receive a lump-sum payment, encompassing all losses sustained (pain and suffering, future wage loss, disadvantage on the labour market, treatment, care costs, etc.), or they can opt for a periodical payment order. This will allow for an agreed sum to be paid to the claimant on an annual basis for the remainder of the claimant’s life. This ensures that there are sufficient funds to meet long-term needs and expenses.
In the event that the claimant opts to receive a lump-sum payment, it is, of course, open to him or her to invest the funds and benefit from the yield. This means that there is potential for a claimant to be over-compensated as a result of jointly benefitting from the entirety of the lump sum, in addition to the interest accumulated from said sum. This would coincide with the basic principle of tort law (a wrongful act/infringement of a right leading to legal liability) – to restore the claimant to their original position. Accordingly, the discount rate is applied and deducted from the total settlement sum to reflect the yield that the sum is likely to return.
Until the recent announcement, this rate was set at 2.5%, as per section 1 of the Damages Act 1996, and has gone unchanged since 2001, [despite discussions to amend having been ongoing since 2010]. However, 27th February 2017 saw Elizabeth Truss, in her capacity as independent Lord Chancellor, decrease the rate to -0.75%. Thereafter, the media fury unleashed.
Direct Line reported that a 1% decrease in the rate would deduct £190 million from their profits. However, Direct Line, amongst a number of other motor insurers, also allege that the rapid increase in whiplash claims negatively impact on their profits. What basis does this actually have? None. Contrary to what the insurance industry and the general media would have you to believe, the number of whiplash claims has actually decreased in recent years. A Freedom of Information request to the government by the Association of Personal Injury Lawyers (APIL) discovered that there has been a drop in the number of claims - from 488,217 in 2012/13 to 376,513 in 2014/15.
The key issue here is balancing the interests of the insurer and the injured party. The claimants securing the large lump-sums are often the claimants who have been the most seriously injured. These claimants are often financially-dependent on the lump-sum for long periods of time or for the duration of their lives. It is these claimants who then have to endure further suffering because their settlement has run out and they can no longer afford care costs.
For the past ten years, index-linked government gilts (ILGS) yields have decreased and decreased, and significantly lower than 2.5%. The rate recently dropped below the 0.5% mark and the average yield for the thirty-six months prior to November 2010 was below 0.5%. When this is coupled with inflation and tax, individuals would struggle to get any net real rate of return, never mind 2.5%.
What this shows is that claimants have been losing out for years and the decision has been a long-time coming. The claimants are 2.5% worse off whereas the insurers have had an easy ride for sixteen years and, arguably, had a cheeky little 2.5% knocked-off of the prices that they have been ordered to pay. However, this is not the final word on matters. The Lord Chancellor also announced a new consultation beginning before Easter, on a range of possible reforms such as whether the rate should be set by an independent body, whether the ILGS-based methodology remains fit for purpose. Accordingly, the rate may change again. For now however, the decrease is a welcomed decision, and hopefully a sign that the current government is beginning to realise that the interests of insurers and the interests of claimants requires to be balanced.
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Blog by Natalie Donald