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Revised discount rate: which side are you on?

Posted: 22/11/2019

On 15 July 2019, the then Lord Chancellor, David Gauke, announced that the discount rate, which is used to calculate the lump sum victims receive for future losses, would change from -0.75% to -0.25%. This was a surprise to many and inevitably the insurance industry felt aggrieved.

The former Lord Chancellor concluded that the revised rate reflected “the most balanced and fair approach following an extensive consultation”.

In February 2017, another Lord Chancellor, Elizabeth Truss, boldly reduced the discount rate from 2.5% to -0.75%, causing uproar in the insurance industry. Although it was acknowledged by most that 2.5% was too high, it was not expected that the rate would be reduced to that extent. As a consequence, the Civil Liability Act 2018 was introduced to provide a framework for a formal review of the discount rate.

Despite dissatisfaction from the insurance industry, most personal injury lawyers consider it is set at the correct level and that the insurance industry received a windfall in previous years, when claimants were under compensated. Regardless of the latest change, the rate of 0.25% should still ensure an injured person is properly compensated, taking into account how an award is likely to be invested.

The discount rate of 0.25% is due to be reviewed again within the next five years, to ensure that the calculation remains accurate with regard to investment returns and interest rates and any other relevant developments.

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Penningtons Manches Cooper LLP