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Ogden 7 tables using the new discount rate of -0.75%

27 February 2017
The announcement today that the injury claims discount rate will fall to minus 0.75% will have come as a surprise to many. The rate is used in the calculation of future damages claims relating to such losses as earnings and the need for care or medical treatment. The substantial reduction in the rate (which was previously 2.5%) will lead to a significant increase in damages paid to seriously injured claimants.

Insurers and many other defendants have been planning for a revised rate for some time, and so the financial impact has to some extent been accounted for (Ageas, for example, announced a £47.3 million hit on profits in Q4, relating to strengthening of reserves in anticipation of a rate change). Esure Group commented on the news today by saying it had anticipated a decrease to 0%. However, few insurers appear to have prepared for the minus 0.75% scenario. 
The Government has also made clear that it expects a significant cost to the NHS Litigation Authority, and has committed to providing appropriate funding to cover changes to clinical negligence costs, while the Department of Health will also work with GPs and medical defence organisations to ensure they also have appropriate funding available to meet the additional costs. The announcement did not deal with the impact on other parts of the public sector.

The significance of the financial impact is striking if an example is considered. A seriously injured 15 year old who requires lifelong care might receive in the region of £250,000 per annum to pay for her care. Under the current regime the capital value of the sum she would receive is £8.5 million, and it is anticipated that this would be invested to provide an ongoing return which would allow her to fund her care needs for life. The new formula would give a capital value settlement of £23.5 million for care.

In practice these costs have frequently been met through “periodical payments” under which the defendant makes an annual payment to the claimant, which increases each year based on a relevant index (such as carers’ earnings) and continues for life. This provides a guaranteed income for claimants, and avoids the risks associated with investment. For defendants it has had the unintended consequence of permitting them to push payments into future years, reducing immediate financial liabilities. The significant change in the discount rate may lead claimants to re-evaluate the attractiveness of lump sum awards, and to favour these, which could lead to an additional financial hit on defendants.

The Lord Chancellor has announced that this change will come into effect on 20 March. While transitional provisions in the statutory instrument (to be published today) should be checked before any precipitous action is taken, it is likely the rate will apply to all claims in which damages are assessed by the Court after 20 March. In the interim there is likely to be a clamour to have trials adjourned. For claims coming up to settlement, where trials are after the implementation date, parties will need to re-calculate their claims to factor in the new rate, and expect to settle on the basis of that rate. Defendants in other cases will need to revisit reserves and Part 36 offers, which may no longer offer any meaningful protection.

Consumers, businesses and public sector organisations can expect an increase in insurance premiums in light of the change. In relation to motor premiums reforms announced last week, may provide some comfort. However, the £40 average motor premium saving anticipated through those reforms is less than PWC’s estimated impact of the discount rate change which is £50-£75. Those exposed to employers and public liability risk have seen only a limited change to the small claims limit and so are likely to be more exposed to premium changes and increased claims costs resulting from the discount rate review.

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