New discount rate for PI claims—modest step in the right direction

From 5 August 2019 the discount rate for personal injury claims is minus 0.25%. Dave Cottam, partner at national law firm Weightmans, comments on the practical implications of the new regime.

Original news

Personal injury compensation payments discount rate set at-0.25%, LNB News 15/07/2019 45

The Ministry of Justice has announced that the new discount rate in personal injury compensation payments will be set at-0.25%. The new rate will come into force on 5 August 2019 and it marks an increase from the current rate of -0.75%, which the Lord Chancellor believes to have led to claimants being substantially over-compensated.

What are the impacts of the new discount rate on future loss claims?

While the change in rate is a modest step in the right direction, by maintaining a negative figure, the government has ensured that we will see many very significant lump-sum compensation pay-outs over the next five years.

This will continue to put upwards pressure on the cost of insurance premiums and will also be felt by the public bodies that commonly pay out for serious injuries.

The key issue is that the rate doesn’t reflect the real-world investment choices of many claimants when it comes to investing lump-sum payments.

One of the key downsides is that the rate makes Periodic Payment Orders (PPOs)—in which the compensator covers the cost of care and other expenses in a series of smaller pay-outs for as long as necessary—look less attractive by comparison.

In fact, PPOs are the only way to ensure the compensation received accurately matches the claimant’s needs which no lump-sum calculation can ever be guaranteed to do.

What has been the reaction from the claimant/defendant side to the rate?

The decision has been cheered by claimant solicitors, especially given how unexpected the announced rate is.

There had been suggestions that the Lord Chancellor would consider the real-world investment decisions of claimants, acknowledging that returns significantly higher than minus 0.25% are available even taking a cautious approach.

It was so widely anticipated that the new rate would be positive that many of the personal injury cases that have settled recently have been based on rates of between 0 and 1% in expectation of the new figure.

What are the practical implications for practitioners over the coming months of the rate change?

The one positive to come out of the decision is that the uncertainty of an impending change has been taken out of the process, giving negotiators more clarity.

Do you have any predictions for the future in this area?

The new rate of minus 0.25% is now fixed for the next five years.

Any attempt to predict how the rate might change next time around would be extremely difficult, given how wide of the mark most predictions were regarding the most recent decision, not to mention the volatility of the current political and economic situation. The Lord Chancellor suggested, though, that he was interested in looking at dual discount rates depending on the duration of any loss. That is something we might well see on the next discount rate review in five years’ time.

We will undoubtedly see very high costs for a number of public bodies in the years ahead. There is a possibility this will prompt a change in the government’s mind-set, but this is far from certain.

Interviewed by Diana Bentley.

This analysis was first published on Lexis®PSL Personal Injury on 31 July 2019. For a free trial, click here.

Filed Under: Personal Injury

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