On 27 February, the Lord Chancellor confirmed that the Discount Rate, a key component of this calculation concerning future costs, is to be reduced from the current level of 2.5% to -0.75%.
The change takes effect from 20 March 2017 and will have a significant impact on the cost of the most serious injury claims. The overall cost to the industry on all impacted claims outstanding at 20 March is predicted to be £7bn, with a further additional annual cost of around £1.2bn thereafter.
The Discount Rate, also known as The Ogden Rate, forms part of the calculation to determine the level of award in respect of cases involving serious injury.
Claims settlements for injury are made up of a number of key components:-
When assessing the future loss of earnings, the Courts multiply the amount they consider the claimant will lose each year by factors such as their age and their projected mortality rate. Similar factors are applied to the amount required for future cost of care.
In the case of serious injury, the amount allocated towards loss of earnings and future costs of care can be high, as the settlement is designed to provide financial indemnity over a number of years.
When such an award is made in a lump sum, it can equate to a considerable amount of money.
As a result, an allowance is made by the Courts in respect of future losses to reflect the fact that the claimant will be able to invest the lump sum awarded and earn interest on that investment over a period of time.
The settlement is therefore discounted by the amount of interest the claimant can expect to earn over the period. It is this adjustment, which is known as the Discount Rate that is the subject of the recently announced changes.
The Discount Rate is linked to returns on low risk investments – particularly index linked Gilt’s.
The Discount Rate which comes into effect on the 20 March 2017 has changed from +2.5% to -0.75%.
This means that, rather than any lump sum award being discounted to allow for a 2.5% investment return, the indemnity settlement will be increased reflecting a decision that over the long term there is predicted to be a negative return on investment.
The Discount Rate has not been adjusted since 2001 despite interest rates falling during that time. The yield on Gilts and Government Bonds particularly has fallen significantly during this time.
The precise impact of the 3.25% change will vary from claim to claim but, in principle, the more severe the injury and the longer the period of time that earnings are lost and care is required, the greater the impact of this change on the settlement amount.
By way of an illustration, some examples are detailed below.
|Example Claimant||Settlement before 20.3.17||Settlement after 20.3.17|
|30 year old plasterer with traumatic brain injury||£2.24m||£6.14m|
|18 year old male claimant with spinal cord injury||£7.6m||£19.3m|
|55 year old male who sustained a below joint amputation||£1.4m||£2.05m|
The overall cost to the insurance industry across all current outstanding claims is estimated to be £7billion.
The estimated ongoing cost for the insurance industry is around £1.2billion per annum.
It follows that large claims, over £100,000 and in particular over £1m are the ones most affected by this change, where future losses form a significant component in the overall claim reserve.
This substantial increase in claims costs will affect all lines of business which can attract claims for bodily injury – including motor, public/products liability and employer’s liability.
As Chartered Insurance Brokers and a leading Independent UK Broker, we will be working with the key insurers to manage any rate increases that insurers deem are required.
In support of this, it is imperative that risk management continues to be an integral part of your company’s work place and MRIB can provide additional support and assistance on this.
MRIB’s in-house Claims Team will also be supporting your Servicing Team in making sure that costs are mitigated.