On 27 February 2017 Liz Truss, the Secretary of State for Justice and Lord Chancellor, announced the outcome of her statutory consultation into the Discount Rate, also known as the Ogden rate, which is used in calculating long term damages to be paid to seriously injured individuals. From 20 March 2017, the rate will be significantly adjusted, reducing from 2.5% to -0.75%. That is rather than damages being discounted, they will now be uplifted, which will have wide ranging implications.
The Discount Rate is used to calibrate the multiplier applied to the damages so they more accurately reflect the level of financial compensation a successful claimant can reasonably expect to achieve through investment of their damages fund. This will provide support for the claimant in meeting the liabilities they will ultimately incur, including potential loss of future earnings and costs of future care.
In reviewing the Discount Rate, it was concluded that the rate failed to take into account changes within the economy and therefore a claimant could actually be worse off. On that basis, the Government is stating that the Discount Rate is changed leading to insurer payments being inflated both for all claims occurring after 20 March and also for those claims that occurred prior to this date that have not yet been settled.
Who will be impacted as a result of the government decision?
In the first instance, the impact on insurers will be significant. Even before the Lord Chancellor’s announcement, Belgian insurance group Ageas announced it would likely incur a €55m (£47.3m) hit to its end of year (2016) results because of the expected cut in the personal injury Discount Rate in the UK. This however was based on a 1.5 percentage point reduction in the insurer’s internally applied Discount Rate to 1% from the current 2.5%. This announcement did not reflect the reduction that actually turned out to be 3.25 percentage points.
Weightmans LLP, who are a top 45 national law firm have produced a report which outlines some examples of how catastrophic injury claim values would be affected by a reduction in the discount rate. In one such scenario, Weightmans have calculated the change in potential claimant damages for a male road traffic accident victim in his early 20s which is one of the most common demographics for catastrophic injury cases. Having sustained a traumatic brain injury approaching maximum severity, resulting in very significant impairment of cognitive function, the law firm have estimated that the damages to that individual would rise from £9,072,028 to £20,023,103 under the new -0.75% rate.
What about consumers and businesses?
It’s impossible at this early stage to provide absolute clarity on the financial impact on premiums but many insurers and industry bodies are already making it clear that such a significant swing (3.25%) will undoubtedly cost many consumers over time. PWC are one such organisation, taking the view that “as a direct result of this change, we anticipate an increase of £50–£75 on an average comprehensive motor insurance policy, with higher increases for younger and older drivers: potentially up to £1,000 for younger drivers (18-22 year olds) and a rise of up to £300 for older drivers (over 65 years old).”
The RAC have also said: “This move will increase the total amount of compensation awarded in every such case and will instantly increase the cost of motor insurance premiums as insurers pass on costs. This will be exacerbated still further in June when another 2% is added to insurance premium tax (IPT) from 10% to 12%”.
Matt Donnelly, Managing Director at Griffiths & Armour Insurance Brokers said: “the recent Discount Rate announcement by the Government and potential knock on effect to insurance premium costs will be a cause for concern for business and consumers alike. It is still too early to understand the full implications on costs, however it is in times like these the value of having an insurance broker who truly understands your business is realised. Griffiths & Armour clients can rest assured we will continue to monitor developments closely and will provide further updates and specific guidance over the coming weeks to ensure they are fully aware of any potential impact the Government decision may cause”.
If you have any questions on this article or the subject matter, please contact your Griffiths & Armour Insurance Broker and they will happy to assist you. If you are not an existing client, contact us at firstname.lastname@example.org and we will be back in touch very soon.