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PI and Civil Litigation

Law - practice - procedure

01 MAR 2017

Discount rate changes

Martin Lanchester


Discount rate changes

The long awaited change to the discount rate has caused a great deal of controversy since being announced by the Lord Chancellor on 27 February 2017. The proposed change to minus 0.75% is due to take effect from 20 March 2017 and is a significant departure from the long standing rate of 2.5%, which has been in place since 2001. The long awaited change has come as a surprise to many who had not anticipated that a negative rate would be set.

The reduction has caused an outcry from the insurance industry with the ABI calling the decision 'crazy' and there remains the prospect of the decision being challenged by way of judicial review.

The effect of the decision, if unchanged, will be a significant increase in awards for future losses which had hitherto been discounted on the basis of claimants being able to receive a rate of return on awards at a rate of 2.5%. The Lord Chancellor has provided further clarification of how she came to the decision to reduce the rate which has based the figures on the rounded up three year average of gross real redemption yields on Index Linked Guilts (ILG's). A link to the reasons can be found here.

On a practical level the new rate will require amended Ogden tables to be drawn up. Some initial versions are already in circulation but it is likely that further input will be required from the Government Actuary and it may be that updated figures on life expectancy could also be included in the new tables.

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However using the figures currently available the effect on value of claims is clear. By way of an example, using the old 2.5% discount rate means that the life multiplier for a 25 year old woman (table 2) is 31.89. However at the -0.75% rate the life multiplier increases to 85.76. This gives a 2 2/3 increase in the future losses.

The example illustrates the profound implications the discount rate change will have for insurers and public bodies such as the NHS and MOD who will face significantly increased awards for damages. A measure of the concern can be taken from the figures being promulgated in the press since the announcement which include an estimated increased annual cost to the NHS of £1billion and increased costs of car insurance going up by £1,000 per year.

The Insurance industry has already been highly vocal in its opposition to the changed rate and in an interesting move CEO's of the leading insurance providers met with the Chancellor last night and produced a joint statement which included a commitment by the Government to undertake an urgent consultation on the framework for setting future rates and to bring forward legislation, at an early stage, if necessary. It is not yet clear what legislation was being envisaged.

In the short term the issues for lawyers acting for Claimants with claims for future losses will be:

  • whether to withdraw any Part 36 offers
  • to immediately amend any existing schedules and apply for permission to update if necessary
  • whether there is a need to apply to amend any existing costs budget
  • renegotiating cases that have reached settlement but not been approved by the court
  • how any claim for future accommodation costs can be calculated as the 'usual' quantification under Roberts v Johnstone would appear to be unworkable with a negative discount rate (with the perverse outcome of having a negative head of loss)
For the humble lawyer trying to protect the interests of clients with claims for future losses these will be challenging times with little certainty available now and little prospect of any being available in coming months.