Brexit, National Security and the NHS are three themes that are key to the election rhetoric of recent weeks. Personal Injury Discount Rate? Not really.
The backlash to the recent rate change, vociferous in some quarters, muted in the whole, however, has an impact which transcends purely insurance and has ramifications that deserve more than just peripheral attention.
Personal Injury Discount Rates
The Personal Injury Discount Rate, simply put, governs the size of a lump sum payment a claimant will receive as a result of the injuries they have incurred. It forms part of an overall calculation which ‘converts an assumed future stream of income into a present lump sum’.
It assumes that should a claimant receive an upfront lump sum payment, they would be able to invest it and receive a return on their investment, and the pay-out by the defendant should factor in this potential return.
Since 1998 it has stood between +3.0 and +2.5%, and whilst it was expected to be reduced to between +1.0 and +1.5%, the Lord Chancellor, Liz Truss, changed the rate to -0.75%, effective as at 20 March 2017.
The effect of this change was seismic. At an average return of +2.5%, in 40 years £100,000 would be worth £269,000. At a negative rate of 0.75%, that same £100,000 would be worth be worth just £74,000, a difference of £195,000.
The effect this has on a pay-out means that a payment which requires an annual income of £100,000 for a sixty year period (the additional life expectancy of a 22-year-old female), which would have cost the defendant £5-6m before the change, would now require a lump sum of around £9m.
The rationale behind the rate change holds its roots in the 1998 case which set the precedent for the previous +2.5% rate, Wells v Wells. Here the Law Lords’ view was that an injured party receiving a lump sum would be risk averse, and would invest in the surest security they could.
It was decided that the logical security would be Index-Linked Gilt yields, which were trading at an average trailing three-year return of +2.5%. By 2017 these have now turned negative with the same return around -0.76% and the discount rate has been changed to reflect this.
Claimants Achieving Financial Gain
Yet two key questions arise: firstly do in practice claimants use Index-Linked Gilts as the vehicle for their investments or are in reality claimants investing in other equally risk averse securities offering better rates of return?
If index-linked gilts are unused by claimants then that puts into question the legal notion that a claimant is entitled to no more or less than that which they would have received had the injury not occurred. If better rates are achieved in reality then claimants are making an economic gain from their injury, going against the intention of the legal precedent.
Secondly, does the fact that personal injury lawyers are increasingly pushing for Lump Sum payments as opposed to Periodical Payment Orders (PPOs which pay out an annual sum to the claimant) suggest that Lump Sum payments are advantageous to the claimant as opposed to PPOs?
PPOs are an extremely accurate way of providing the income to put the claimant back in the position they would be if not for the injury. This is because the defendant pays the agreed annual costs on an annual basis, inflation adjusted.
So an increased tendency to push for lump sum payments in light of a rate change would suggest that the claimant’s representatives feel there could be an economic gain from such an approach.
Why Does It All Matter?
The effect of this rate change cannot be underestimated and with it the importance of assessing damages correctly.
At first glance, and the least sympathy inducing impact is a significant reduction in Insurer’s profits. Aviva declared an exceptional charge of £385m, Admiral £93m and Direct Line approaching £115m.
Corporates will bear only a portion of the impact and will inevitably pass on some of the costs to consumers. The Association of British Insurers estimate 36m individual and business insurance policies will be affected, and PwC predict an average uplift of between £50 and £75 on comprehensive motor insurance policies, with increases of up to £1,000 for younger drivers (18 to 22-year-olds).
Rising premiums alone, when weighed against a series of individuals suffering catastrophic and life-changing injuries, seems a price many would pay, and there is little doubting the validity of the claimant’s entitlement to appropriate reparation.
Nevertheless, a huge consequence will be on a body at the heart of the election debate, the NHS. Christine Tomkins, Chief Executive of the UK’s largest medical defence organisation, the Medical Defence Union, estimates that the NHS will need to find £5.9bn in increased funding over the next three years, just to cover the increase in potential payouts.
Furthermore, General Practitioners (GPs) already facing compulsory Professional Indemnity cover, which has risen over 50% since 2010, face the prospect of an impending hike to factor in this new rate. Dr Matthew Lee, MDU professional services director, has recently described the situation not only as ‘catastrophic’ but with the potential to ‘threaten GPs’ ability to continue to practice’.
Unlike hospitals, GPs must pay for the compulsory insurance out of their own budgets, with an obvious impact on their personal income. For a government facing continued criticism over public salaries for health professionals, this is a further, if under the radar, bit of bad press.
Whilst not exploding into public consciousness, the changing of the Personal Injury Discount Rates is profound, putting a strain on both the consumer’s purse and basic public services. Such an impact must be based on a sound and accurate reasoning which relates to the realities of claimant’s investment decisions, but both the Government and the Association for Personal Injury Lawyers have admitted there is very little analysis of how claimants in practice invest their money.
More than just a discount rate, it is a question of grave impact to claimants moving on after a serious injury and the public seeking a health service that helps them when they need it most.
Such a sensitive issue needs a consultation which pays attention to its vagaries and must be at the forefront of any incoming government’s immediate plans.