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Calculation of Personal Injury Compensation Continues to Benefit Claimants

View profile for Robert Dempsey
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On 15 July 2019, the Justice Secretary, David Gauke, announced the new Discount Rate figures used to calculate future losses in personal injury claims.

Where a claimant’s injuries are long term or permanent, they may receive a lump sum award to account for their future financial losses and expenses. This could include loss of earnings, future medical costs or home adaptations. Rather than receive the compensation over time, it is often more convenient for all concerned to receive the payment in a single one-off lump sum.

Part of the equation to calculate the lump sum includes a “Discount Rate”.  It is this Discount Rate which is the focus of the recent Government announcement.

Traditionally it was felt that to receive a full, one-off lump sum payment was financially advantageous to receiving payment in increments over time, the logic being a sensible claimant would invest the money wisely and actually receive more than the actual loss.  

This is contrary to the long-standing principle that claimants are not to profit from their injuries but should be put back in the financial position they would have been in had the accident not occurred. It is, for this reason, it is considered appropriate the lump sum should be discounted.

If a 55-year-old woman, assumed to retire 15 years later at age 70, had an annual loss of earnings of £5,000, one would not calculate her losses by simply multiplying the £5,000 by the remaining 15 years leading to an award of £75,000.

Instead, the £5,000 a year would be multiplied by a Discounted Rate. At one stage (prior to March 2017), the Discount Rate was 2.5%, meaning a multiplied figure 12.12 (as opposed to 15) leaving a lump sum of £60,600 rather than £75,000. This clearly benefited insurers representing the paying party.

This changed in March 2017. Rather than apply a Discount Rate of 2.5%, the new figure was minus 0.75%. Using the same example above, the calculation saw the annual figure of £5,000 being multiplied by 15.3 leading to a payment of £76,500. It is clear, therefore, why the insurance industry was dissatisfied with that arrangement. By this example alone, the compensation for future loss of earnings increased by £15,900.

Understandably, both the insurance industry and solicitors representing injured claimants have been waiting with bated breath for the new announcement on the Discount Rate and, of the two groups, it is the insurance industry that will be most disappointed.

The new Discount Rate as of 5 August 2019 is set at minus 0.25%. Whilst this is a slight decrease from the previous rate, insurers had hoped the revised rate would be more favourable to them, and perhaps see a step closer back to the pre-March 2017 figures. Using the above example again, the claimant would receive £73,750 for future loss of earnings.

In balancing the needs of personal injury claimants and the lobbying power of the insurance industry, the Justice Secretary said: “it is vital victims of life-changing injuries receive the correct compensation – I am certain that this is the most balanced and fair approach following an extensive consultation”.

So why has the Discount Rate been subject to change at all?

The 2.5% Discount Rate was set in 2001 and remained at the same level for 16 years before being changed in March 2017. The 2.5% rate was based on index-linked gilts, i.e. bonds issued by the Government. Since 2001, the yields on index-linked gilts have systematically fallen and so an investment made in 2001 would not produce the same yield as an investment made in 2017. The new figures represented the returns on investment.

The Government recognised this led to a shortfall in compensation leaving injured parties wanting.

The new changes still maintain the principle that somebody who is injured through no fault of their own should not profit from their loss but equally should be placed in the position they would have been in had the accident not occurred. The new figure of minus 0.25% is designed to maintain this principle by considering a number of factors including actual returns available to investors, allowances for inflation and wider economic factors.

Solicitors who represent the interests of individuals and families affected by injuries and fatalities welcome the announcement. The previous dwindling rates of return on investments would mean any return to a significant Discount Rate would mean that people injured through no fault of their own would not receive appropriate levels of compensation and in many cases would fall to rely upon Government care and assistance rather than turn to the parties found at fault for their injuries.