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Recent Changes in Discount Rate in Personal Injury Claims

August 7, 2017 at 9:00 AM

On the 20th of March 2017, the Lord Chancellor reduced the ‘Discount Rate’ in Personal Injury claims from 2.5% to -0.75%. This may have been something you heard about and perhaps wondered about its significance. Well, for a severely injured person and their families, this change is immensely significant.

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If you are claiming compensation for a personal injury, the focal objective is to put you in the financial position you would have been in, had there not been an accident. In many cases, a Claimant will receive a lump sum compensation which covers their future financial losses. For example- lost earnings, future care needs and additional treatment. The Claimant is then expected to invest this money to receive a return where it can be used for their future needs.

So where does the Discount Rate come in?

A personal injury Discount Rate is a rate where by any compensation received in relation to future losses is reduced to reflect the interest they will receive for investing the lump sum. If the discount rate is too high, this results in the Claimant being under compensated due to inflation and if the discount rate is too low, the Claimant could be overcompensated by way of interest on the investment.

Previously, the Discount Rate was 2.5% and this had not been changed since 2001. The percentage, at the time, was intended to reflect the average redemption yields on Index-Linked Government Stocks (ILGS). The ILGS yields have decreased significantly below 2.5% for several years thus the Association of Personal Injury Lawyers (APIL) took the step of commencing legal action to represent claimants adversely affected by this rate.

Neil Sugarman, Fellow and Executive Committee member and past president of APIL, stated that ‘People with lifelong injuries are continuing to be overcompensated, in some cases, by hundreds of thousands of pounds, because successive governments have dragged their heels and failed to review the discount rate to reflect changes in the economy’.

What is the current position?

Earlier this year, and in response to criticisms around the lack of change, the Lord Chancellor reduced the Discount Rate to -0.75% and whilst insurance companies may disapprove of this alteration, the prodigious fall of 3.25% clearly acknowledges how outdated the previous rate was and begs the question - how many severely injured people have been undercompensated as a result from this?

The Law Society of England and Wales president Robert Bourns has welcomed the change and has commented on how this will make a difference including in cases involving: brain damage at birth and in circumstances involving essential compensation to cover support and adaptations needed to help individuals live as normal a life as possible.

Essentially, the change means that severely injured victims will no longer be lost in an outdated system, but will have a fair and correctly calculated opportunity of receiving accurate compensation.

In a nutshell, the discount rate will help to ensure that Claimants are compensated in such a way that will leave them in a more realistic financial position.

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