The New Personal Injury Discount Rate (July 2019)

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Civil Liability Bill 2018

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On 15 July 2019, the Lord Chancellor announced the first new discount rate under the provisions of the Civil Liability Act 2018.

 

In September 2017, the Justice Secretary, David Liddington, had led the market to believe that the new rate might be in the region of 0% to 1%. The Chair of the Justice Committee had said that the rate would be set somewhere between 0.5% and 1%. In light of this, many are surprised that the new rate has been set at -0.25% with effect from 5 August 2019. However, whilst this is at the very lowest end of expectation, it is not a complete surprise in light of developments in Scotland during the passage of the Damages (Investment Returns and Periodical Payments) (Scotland) Act 2019.

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The Government’s impact assessment suggests that the change in rate from the current -0.75% will save insurers £320 million per year and save the NHS £80 million per year.

 

The ABI have responded by stating that the new rate is a bad outcome for insurance customers and taxpayers that will add costs rather than save their customers money. They have also indicated that it will put further pressure on premiums.

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It is clear from the Government’s statement that the Lord Chancellor has built in “further prudence” than that recommended by his Actuary Department by choosing a rate of -0.25% on the basis that this means Claimants on average are twice as likely to be overcompensated as they are to be undercompensated.

 

Needless to say, Claimant organisations have welcomed the review.

 

It is also clear that whilst the Government gave consideration to a dual discount rate, it took the view that there was currently insufficient quality of evidence to introduce dual rates. That option remains open in future reviews.

 

The review means that England and Wales are left with one of the lowest discount rates in the western world and makes it less attractive to international capital.

 

The next review of the discount rate has to be started (not finished) within the next 5 years, ie – by no later than 14 July 2024. In the meantime, we will have a period of stability where both Claimants and Defendants alike will have certainty during negotiations.

 

From a practical point of view, the new discount rate means that:

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• Reserves will have to be recalculated.

• Any outstanding Part 36 Offers will need to be reconsidered.

• Cases which are settled, but awaiting Court approval, may need to be renegotiated.

• In cases where negotiations have been postponed pending the announcement of the discount rate, they can now continue with certainty.

• Accommodation claims will remain problematical with the Roberts v Johnstone methodology remaining unsuitable with a negative discount rate.

 

In the future, leading up to the next review in 5 years’ time, it is likely that we will see a return to tactical behaviours in either speeding up or slowing down negotiations and Court process depending on the perceived outcome of the next review.