What is the Discount Rate?

You may have seen in the news that the Justice Secretary, Liz Truss, has changed something called the “discount rate”.  This applies in a personal injury case where there is any claim for future loss, for example, future loss of earnings, or future care.

The news reports refer to the possibility of insurance companies raising the costs of motor premiums, but it is important to be aware that the change is not confined to road traffic accidents but will affect any kind of accident, whether in the workplace, or due to clinical negligence, as well as road accidents.  The background is that, very commonly, the damages for that future loss are paid in a “lump sum”.  In other words, a calculation is made as to what those losses may be, and over how long a period.  The amount of damages is either agreed in a settlement or, in the absence of agreement, by a judgment of the court.

The underlying assumption for many years is that if a claimant received a lump sum, he will then invest that money and get a return on it.  So the amount that a claimant gets is “discounted” by the assumed investment return.  For many years, this has been set at 2.5%, the so called “discount rate”.

 

Why the Discount Rate has changed.

However, the trouble with this is that for many years indeed this has been wholly illusory.  Claimants are not able to achieve this kind of return, as a consequence of inflation and the low return on savings.  The sad fact is that if you receive a lump sum for a future loss, then you will not be able to invest this money and get a savings return of 2.5%.  Rather, you are more likely to make a loss as inflation will eat into the money far faster than the very modest returns that you are likely to achieve.

Solicitors representing injured persons have been campaigning for a change in the discount rate and at long last, this has now been recognised by the Justice Secretary.  So she has made a very dramatic announcement reducing the discount rate from 2.5% to minus 0.75%.  In other words, recognising that you will lose money in the long term as a result of the present savings environment, coupled with inflation.

 

Why the change is a good thing.

You could be mistaken from recent press reports referring to the possibility of insurance companies raising the costs of motor premiums, in thinking that the change in discount rate is a bad thing.

However, it is important to be aware that the discount rate is used in cases where someone has suffered long term, life changing injuries as a result of an accident and may now have long term care requirements and be rendered unable to work as a result of disability.

The change in discount rate means that people with life changing injuries will now get a substantial increase in the compensation they receive that can be used to improve their quality of life.  This is good news: it has righted what has been a great injustice for many years for those seriously injured persons.

Understandably, perhaps, the insurance industry who will be paying out higher sums of compensation are unhappy about the decision, but we hope that the Government stand firm in their decision and that injured persons are no longer prejudiced in their compensation claims by a discount rate that did not reflect the current economic climate.

The new discount rate comes into force on Monday, 13 March 2017.