In July 2019 the two top searches for ‘discount rate’ brought headlines of ‘Car insurance to get cheaper for millions thanks to new discount rate’ and ‘Car insurance costs likely to rise following change to compensation rules’, so claimants could be forgiven for having some questions about the rate, which was updated on 15 July.
This article explains the discount rate, the recent changes, and the relevance to claimants, particularly those making claims for negligent Cauda Equina Syndrome treatment, where a large part of the claim often relates to future costs of care and medical treatment.
Simply put, the discount rate is the assumed growth that a claimant will make on any damages, cautiously invested, over and above inflation. This is important because most claims are settled on a one-off ‘full and final’ settlement basis, with damages being received at the time of settlement, even though some costs such as care and medical fees may not be incurred for many years to come. Therefore it is assumed that the claimant will invest those damages, cautiously, until the time that they are needed.
Historically (since 2001), the discount rate was set at 2.5%, which was based on returns provided by Index Linked Gilts, a government-backed, and hence very secure means of investment. The legal system assumed that if a claimant invested their damages, they would achieve 2.5% above the rate of inflation.
However, in 2017, given the parlous returns available to investors, it became apparent that it was simply not possible to gain these rates of return on cautious investments. In the 10 years since the banking crisis, gilt yields had fallen from around 5% to around 1%, and at this rate, invested damages would not be keeping up with inflation. That prompted a review in the discount rate, and the new rate was revealed as -0.75%, meaning it was assumed that claimants would be losing 0.75% of the value of their damages year on year. As a result, they needed to claim more now than they were going to need in the future.
The upshot of this was that in order to pay for future damages, insurers and NHS Resolution were faced with significantly higher bills than previously.
By way of example, compensation for a 50 year old female totalling £20,000 a year, that included a claim for care for the rest of her life, would be worked out as follows:
Say the same claimant knew that she was likely to require a sacral nerve stimulation operation in 10 years’ time, costing £15,000:
Previously she would have claimed £11,718, which it was assumed would grow by 2.5% a year in the 10 years before surgery was needed. At the -0.75% rate, she would actually claim £16,173 to take into account the assumed losses that she would make in those 10 years.
It is clear from these brief examples the effect that this move had on the level of claims. Unsurprisingly insurers reacted with huge disappointment to the move, and lobbied hard for a further review of the rate. They argued that in reality, no claimants actually invested in such safe investments, particularly knowing that they would lose money – they would take financial advice and invest in equities, which provided higher returns. The concern was that claimants were being ‘over compensated’, at a cost to insurers and public bodies.
However, after a long consultation process, and significant delays, the new rate was announced in July 2019, at -0.25%.
Using the example above, our claimant will receive £817,600 for the same claim that would have attracted £482,000 a few years ago. A significant increase, but likewise a large drop from the level she would have claimed only a year ago.
Her sacral nerve stimulation operation cost would be claimed at £15,379.
This new rate came as a surprise to many, as it still assumes that investors will make a loss on their investments after inflation. The current environment is therefore perhaps more ‘claimant friendly’ than anticipated.
However, it is vital that claimants are not under-compensated. CES claims will often include significant future medical expenses claims for urological, colorectal, and potentially psychological and counselling treatment. Some claimants require a case manager to coordinate their care, occupational therapy input, aids and equipment, and additional costs to modify their homes to accommodate their disability. A number may well find themselves out of work, either immediately following their injury, or being forced to take early retirement, with a resulting loss of earnings and loss of pension contributions. All of that comes at significant cost.
A relatively small change in the discount rate has a similarly large effect on all these losses, so parties, insurers, and public bodies will no doubt take great interest in any future changes. The next rate review will be in five years.
As for whether car insurance will actually go up or down… well, on the one hand this rate is better for insurers than -0.75%, so it should go down… but on the other, insurers had budgeted for something in the region of +0.5 to 1%, so the new rate is worse than they were expecting. It is still unclear which of those headlines will be correct.
Philippa Luscombe, a partner in Penningtons Manches Cooper’s specialist Cauda Equina Syndrome sub team said: “The changes in discount rate have been of great interest to lawyers on both sides. The key is to ensure that claimants, who we must remember have been injured through no fault of their own, receive an appropriate level of damages. Some of our Cauda Equina Syndrome clients require significant levels of care for the rest of their lives, although generally speaking suffer no loss to their life expectancy as a result of their disability, so they need to plan for potentially many years of care. Medical technology keeps improving, but at a cost, and we cannot risk a scenario where people are unable to access the correct care because we have not budgeted appropriately in the past.”