The Discount Rate in Clinical Negligence and Personal Injury Claims

The Discount Rate in Clinical Negligence and Personal Injury Claims

The discount rate is a concept that the Clinical Negligence team deal with on a daily basis. Following a successful claim, a client can often expect to receive a lump sum payment as part of the damages awarded to them. This figure is then adjusted in relation to the ‘discount rate’.

What is the discount rate?

Any lump sum payment is calculated using a multiplicand and a multiplier.

• Multiplicand - the future annual loss the claimant can be expected to suffer.
• Multiplier - a figure determined by reference to the discount rate.

When the ‘multiplicand’ and ‘multiplier’ are multiplied together they produce a figure which is the present value of the prospective loss over the claimant’s life time taking into account the interest the claimant can earn by investing their money.

The Courts treat the claimants as risk adverse investors. Lord Steyn reinforced in Wells v Wells that claimants shouldn’t have to gamble with investment opportunities to make enough money to support them for the rest of their life. Therefore, the discount rate is linked to the returns generated by low risk investments, namely, Index Linked Government Securities (“IGLS”).

The discount rate pre 20.03.17

The discount rate was set at 2.5% by the Lord Chancellor, Lord Irvine, in 2001. This reflected the returns in IGLS at that time.

This discount rate was not reviewed until 2012 and by this time it had attracted a significant amount of criticism from claimants and their legal representatives. Interest rates had plummeted since the financial crash of 2008, meaning that it was now impossible for a claimant to secure a safe investment with a discount rate of 2.5%.

In the case of Simon v Helmot, the judge departed from the discount rate and set lower discount rates which differed for different heads of damage. He worked on the presumption that a return on an investment would lag behind inflation and so using a 2.5% discount rate would have been grossly unfair. Both this judgement and the review in 2012 indicated change might be on the horizon.

The discount rate post 20.03.17

On the 20th March 2017, the Lord Chancellor, Liz Truss, reduced the discount rate to -0.75%. This change was of course welcomed by claimants and criticised heavily by defendant insurers. It was expected for some time by both sides that the discount rate would be lowered, as it had not been changed in sixteen years, however, no one expected a negative figure.

Within 24 hours of the announcement, sixteen executives of the UK’s largest insurance companies had called a meeting with Philip Hammond, the Chancellor of the Exchequer to request a U-turn. They warned that this would lead to increased lump sum payments to claimants which would push insurance premiums up for millions of UK businesses and people.

Claimants saw this as a long awaited change and felt the new discount rate finally reflected the fact that claimants were risk adverse investors. They felt that the defendants had benefitted for too long from undercompensating the claimants and welcomed the change.

It must be noted that although the overall effect of a lower discount rate has been to benefit claimants, accommodation claims have produced troubling results for claimants (see MWB blog 24/01/18).

What has been the impact?

Defendant insurers and public services with large liabilities such as the NHS have been impacted in the way they feared. Profits have decreased as pay-outs to claimants have increased. Allianz UK revealed that their profits for the year following the change were £22 million down on what they would have been had the discount rate remained at 2.5%. Catastrophic injury claims and clinical negligence claims involving children now produced pay-outs that were 30% and 50% higher.

The table below shows a comparison of the compensation received with a discount rate of 2.5% and then of -0.75% for a woman who is 25 years old when her catastrophic injury occurs. The difference is staggering.

DISCOUNT RATE	MULTIPLIER	ANNUAL LOSS	TOTAL LOSS
2.5%	26.1	£22,000	£574,200
-0.75%	49.66	£22,000	£1,092,520

 

Despite the ongoing criticisms by the defendants, the discount rate has not yet been reviewed and remains at -0.75%. The effect of a clinical negligence or personal injury action is to put the claimant back in the position they would have been had the negligence not occurred (Wells v Wells). The maintenance of the discount rate at -0.75% ensures this. It is important to remember that the reason for these payments in the first place is the negligence of the defendant

The change in discount rate has created an understandable state of limbo with regards to settlement. Defendant insurers are hesitant to settle whilst they fight for reform, in the hope that they will get a reduce rate and so make a lower pay-out. Conversely claimants want to settle as soon as possible due to their advantageous position.

Future change to the discount rate

Opinion is clearly divided on the way forward with claimants satisfied with the current position and defendants eager for change.

Claimants point out that the increase in payment merely provides them with the money they are entitled to. They emphasise that the risk of overcompensation can never be fully eliminated due to the following factors impacting the lump sum in a number of ways and meaning a shortfall or deficit of funds is inevitable:

• People living longer or shorter than their life expectancy prediction
• Assumptions as to future needs never being completely accurate
• Uncertainty over investment outcomes
• Inflation fluctuations

The Government Actuary Department commented in 2017 that if the discount rate was to be raised to 0.5% then 41% of claimants would become undercompensated. If this was the case then it would become unsustainable for firms to take on clinical negligence work and more claimants would have to represent themselves. This would create real problems for access to justice in cases which are so complex in nature.

The Civil Liability Bill went before Parliament in 2018 and received royal assent on 20 December 2018. This lead to the creation of the Civil Liability Act 2018 which sets out a new model for setting the discount rate based on ‘low-risk’ rather than ‘very low risk’ with reviews imposed at three yearly intervals. This will ensure that, should changes in the investment market mean that claimants are being overcompensated; the discount rate should be reviewed and changed. This should be of some comfort to defendants.

Defendant insurers will continue to be unhappy until an increase in the discount rate increases leads to reduced claims and smaller compensation payments. They are concerned that any improvement in the economy will lead to claimants in fact profiting from their claims.