The Discount Rate in Personal Injury Compensation
When the victim of an accident makes a claim for personal injury compensation, the overarching aim of any damages award is to restore the claimant to the position they would have been before the accident. While compensation can’t heal injuries, it does mean that the claimant won’t lose out financially.
For a car accident claimant who suffers a soft tissue injury which causes them to miss three weeks of work, their compensation will be calculated according to the amount of pain and suffering caused, alongside sums for any special damages, such as loss of enjoyment of a sporting hobby, plus any loss of earnings.
If the car accident claim involves, for example, a life changing spinal injury, the amount of compensation awarded will need to account for a lifetime of care and loss of earning potential. The lump sums involved for catastrophic injury claims can be significant and may even reach seven figures depending on the claimant’s circumstances pre and post accident.
What is the discount rate in personal injury claims?
Successful claimants are expected to invest any lump sum award and use the returns to fund their regular needs. The personal injury discount rate is set by the government to adjust the compensation received so that inflation and interest rates are accounted for. When the discount rate is too low the claimant could be overcompensated as interest rates and investment returns could add extra funds to their lump sum award. If the discount rate is too high, the claimant could lose out as the value of their award will not keep up with inflation.
How often does the discount rate change?
On 27 February 2017 the personal injury discount rate changed for the first time since 2001. It was reduced from 2.5% to -0.75% (minus 0.75). This was largely as a result of a long period of low interest on certain types of investments. Effectively, this meant that organisations paying compensation settlements (typically from the insurance sector) have had to pay more to return claimants to a financial position equal to their pre-injury state.
In September 2017, the government confirmed that the draft Civil Liabilities Bill would be put before parliament. The Bill proposes the following changes to the discount rate in personal injury claims:
- Rates will be set using expected returns on a “low-risk” diversified portfolio of investments rather than the “very-low-risk” investments used currently – this will mean anticipated returns could be higher, so the discount rate is likely to be increased from the current -.75% (insurers will pay less).
- Regular rate reviews will take place at least every three years once legislation amendments are in place.
- An expert panel will consult with the Lord Chancellor to set new discount rates.
When are the changes likely to come into effect
If the Civil Liabilities Bill is passed through government (the third reading is due in the House of Lords very soon) it is expected the Bill could be passed into law in 2019 with widespread consequences for personal injury compensation especially in respect of low value claims.