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How will the Personal Injury Discount Rate review reduce compensation for the severely injured?
The Lord Chancellor has now begun a review of the personal injury discount rate. This will inevitably lead to a significant reduction in compensation payments for severely injured victims of negligence. It follows on from the Civil Liability Act 2018 which came into force on the 20 December 2018.
What is the Personal Injury Discount Rate? Why does it matter?
The personal injury discount rate makes a big difference to the amount of compensation paid to those who have been severely injured as a result of negligence. This compensation is relied upon to meet the cost of lifelong needs for care, specialist equipment and therapies or to compensate for a lifetime’s loss of earnings.
To compensate for future costs over a lifetime, the annual cost is multiplied to reflect the estimated years of remaining life expectancy. If someone is expected to live another 50 years, the compensation isn’t calculated by multiplying the annual losses by 50 as this approach would not take account of the interest received from investing the compensation or the effect of inflation. The figure, in this example 50, is discounted by the discount rate, to give the figure by which the annual loss is multiplied (the ‘multiplier’).
In 2017 the Lord Chancellor reduced the discount rate from 2.5% to minus 0.75%, a dramatic reduction which reflected the very low and often non-existent interest rates available to cautious investors. The impact of this change was a significant increase in serious injury compensation. By way of illustration, someone with a further 50 years to live went from multiplying their annual losses by 28.72 to multiplying their annual losses by 60.71. Somewhat predictably, the change was followed by an almost immediate call from upset insurers for the law to be changed via the Civil Liability Act 2018.
What did the Civil Liability Act do?
The Civil Liability Act alters the way that the personal injury discount rate must be set in future, by changing the assumption it makes about how compensation is invested.
In the past it was assumed that compensation was invested very cautiously, using very low risk investments which, particularly at times of low interest rates, produce very little interest or ‘return on investment’. As investments were expected to produce very low returns, the compensation payments needed to be higher to provide adequate compensation for future costs and financial losses. The Act changes the assumption, so it is now assumed that compensation will be invested in low (but not very low) risk investments which provide a slightly higher rate of return.
As the Civil Liability Act now requires the discount rate to be based on the assumption of a slightly higher investment return, the Lord Chancellor must now review and re-set the discount rate to ensure that compensation payments are reduced in accordance with the new assumption.
Whilst we can be sure that the new discount rate will increase, resulting in a reduction in compensation for those who have been seriously injured, at this stage we do not know by how much. The Lord Chancellor must complete his review and set the new personal injury discount rate by 5th August 2019.
Boyes Turner continue to protect our clients’ interests
Throughout the period of uncertainty that followed the discount rate change in 2017, Boyes Turner’s specialist brain and serious disability lawyers have worked to protect our clients’ interests, utilizing the sadly short-lived but highly beneficial discount rate wherever possible to secure high value settlements in appropriate cases.
Beyond discount rate concerns, however, our considerable experience of helping the most severely disabled clients has led us to understand the importance of financial security and peace of mind for our highly dependent clients and their families. We achieve this consistently by negotiating settlements combining capital lump sums (for items such as adapted accommodation and specialist equipment) with annual payments (periodical payment orders (PPOs)) guaranteeing lifelong provision for essential care and other ongoing costs by annual, index-linked payments for the remainder of the injured person’s life.
At Boyes Turner, our clinical negligence and personal injury lawyers echo and support the response of the President of the Association of Personal Injury Lawyers (APIL), Brett Dixon, to the Lord Chancellor’s announcement of the discount rate review, calling upon the Lord Chancellor to base his forthcoming decision on the needs of those suffering from life-changing injuries, rather than insurance industry profits, whilst encouraging greater use of PPOs.
If you are caring for someone with severe disability caused by negligence and would like to find out more about making a claim contact our specialist team by email at email@example.com.