Discount rate – one year on
It hardly seems a year ago now that the “discount rate” was dramatically lowered by then Lord Chancellor, Elizabeth Truss, from 2.5% to minus 0.75%.
The discount rate is a percentage the courts apply to annual losses in order to reflect a claimants’ likely real net rate of return on investment in lower risk investments. This is intended to ensure that a claimant, who may receive lost earnings to retirement, or all their care costs, in one lump sum, is put in the position they would have been in had they not been injured and are not over-compensated.
27 February 2017 was a memorable day. The gasps from those in the injury claims world were audible. The last time the rate was set was in 2001 at a time when the Bank of England interest rate was 6%. Calculators were grabbed, files were reviewed, urgent emails and tweets were sent.
Claimant lawyers, spearheaded by APIL (the Association of Personal Injury Lawyers) had campaigned for over a decade for a lowering of the rate. A reduction was indeed expected and long overdue. We argued that at a time of prevailing historically low interest rates, claimants’ hard-fought compensation was being excessively discounted on the assumption of investment returns which could never come to fruition. Claimants who depended on their compensation to meet a lifetime’s care needs, for instance, needed to be treated as risk adverse investors and not be forced to gamble the compensation they depended in a risky investment portfolio in order to offset inflation and to meet their needs.
Successive Lord Chancellors had resisted calls for the discount rate to be lowered, throughout the sustained period when economic conditions resulted in interest rates remaining below 1% from 2009. Indeed in 2001, the year the last rate was set, the Bank of England interest rates decreased from 5.75% to 4% and by the end of 2008 had slid further to 2%. These dramatic changes had never been followed through into the discount rate. The issue was of course hugely political as the NHS are – sadly – the largest defendants in the injury litigation arena.
Notwithstanding the rate having remained the same for 16 years, when it was reduced a consultation process was immediately announced and the very next day the UK’s main insurers were given an audience at Downing Street to express their concerns. Whilst there was enormous relief from our camp that, at last, injured claimants would be fairly compensated, there was an initially disbelief at the scale of the change. Comments such as “It must be a misprint”; “This will have to be reversed”, “It is outrageous – insurers will go bust” were commonplace. There were even calls for Ms Truss to lose her position, despite her having heard for months evidence from the leading financial experts in Britain as to the appropriate rate to set. Quick calculations illustrated that a catastrophically injured client’s compensation would be substantially increased by hundreds of thousands of pounds. However, there was an unexpected side-effect. As the same percentage discount is applied to the methodology by which accommodation claims are calculated, the minus rate effectively took away an award for such losses.
So, have the gloomy predictions come true in the last 12 months? Work on the Brexit referendum result of the previous summer continues to occupy a great deal of the political agenda and parliamentary time. We have seen a snap general election and two new Lord Chancellors in 12 months. There has been no quick reversal of the rate, as some predicted, and the consultation process continues with no official indication yet as to when it will conclude. The only indication so far seems to be that in future the rate will be re-set much more frequently.
Notably insurers have continued to make record breaking profits:
- Allianz UK – 26% increase to £121 million;
- Aviva operating profit up 2% to £3,068 million;
- AXA revenues up from £4.39 to £4.53 billion;
- Direct Line operating profits up 51.4%;
- and Admiral profits up 43%.
Insurers admit that they have passed on the costs directly to consumers through their premiums. I am not sure how true this is – mine happen to have fallen in the last year – but I for one do not mind paying £5 per month more on my car insurance if I was told that this was to compensate fairly survivors of serious accidents. Certainly, predictions of unsustainable losses within the insurance industry appear wide of the mark.
What of settlements? Unfortunately, at a time when survivors and their families need clarity and early recourse to justice, there is uncertainty and yet more delay. Initially many claims were put on hold as an immediate increase in the rate was expected in some quarters. There was an unwillingness for insurers to accept this change in the claimants’ favour. Some insurers have refused to settle cases at the prevailing legal discount rate, forcing claimants into having to choose between going to court at expense, risk and delay if they want the issue adjudicated upon, or take offers on the table and move on with their lives. In terms of accommodation claims, creative thinking is still needing to be applied to get around the problem; as in the interests of justice it cannot be right that those who require larger accommodation for live-in carers or level storey wheelchair accessible accommodation, due to the negligence of others, cannot in law recover any compensation for the additional cost.
APIL report that insurers are raising late, fresh issues in claims and deploying other tactics in an effort to put off trial dates. As claimant lawyers representing some of the most vulnerable people in our society, we are reminded every day that we need to do all that we can to ensure that our clients receive fair and timely compensation. After all, long after the insurers have closed and archived their files, our clients continue to live with their injuries and all their consequences and also bear a lifetime’s risk that their hard-fought compensation may one day run out or fail to meet their reasonable needs.