Never discount the power of the insurance lobby

The Ogden or ‘discount rate’ is applied to personal injury settlements when deciding the appropriate amount of money to award victims of negligence as a lump sum payment. The discount rate is applied to take account of the expected return if a lump sum is invested over time.

In basic terms payment for future loss is discounted because it has been awarded in one go, rather than spread out over the future years it is intended to compensate for. There is an assumption the award could be invested so that without the discount, the recipient would receive ‘overpayment’

Until February 2017, the discount rate was 2.5% per annum and had been for many years. However since then a lot has changed. ILGS yields (average redemption yields on Index Linked Government stock) have slid down significantly below that rate, and more critically below the rate of inflation. This has resulted in lump sum compensation awards being eroded over time and not keeping pace with rising prices. Ultimately this leads to compensation payments running out.

In February 2017, the former Lord Chancellor Liz Truss set a surprise new rate which amounted to a damages top-up rather than a discount of -0.75%. The change came into effect on 20 March 2017, in making the change, Liz Truss explained that:

‘The law is absolutely clear – as Lord Chancellor, I must make sure the right rate is set to compensate claimants. I am clear that this is the only legally acceptable rate I can set’.

The change had an immediate impact, especially on those cases where settlement was imminent and where there was a large element of future loss, increasing the value in some cases involving catastrophic injury by millions of pounds overnight. Yet this did no more than recognise the reality for injured victims which were that awards for future loss needed to be increased to counter the combined erosive effect of high inflation and low interest rates in order to preserve value over time.

The insurance industry unsurprisingly were opposed to such a radical change, describing the government’s move as ‘reckless in the extreme’ and warning that motor insurance premiums would be increased, as would the NHS’ annual compensation bill. In the face of intensive lobbying the government has recently announced a review of the way the discount will be arrived at in future.

Their consultation paper published on 7 September 2017 (only 6 months after the initial change came into effect) suggested that in future:

  • The discount rate would likely be adjusted to a figure of between 0% or 1% (a compromise between the two previous rates);

  • The new proposed rate will be based on the net investment returns that an individual can hope to achieve in a low risk diversified investment portfolio;

  • The new proposed rate will be reviewed by the Lord Chancellor every 3 years going forward, in consultation with an actuary, an investment manager, an economist, and an individual with experience in consumer investment affairs;

Some have described the move as a reasonable compromise that reflects the realities of what injured people do with their awards, better incentivizing a low risk strategy that would enable settlement awards to last the periods they were designed to compensate for. Others have reported concern about the comparative lobbying power of the insurance industry.

Constant change in the rules also presents challenges from a legal perspective. Claims coming up to settlement are having to be valued on today’s existing rules and tomorrow’s anticipated ones which increases cost. Settlement meetings are being postponed until the final discount rate is decided (unlikely to be until next year), which in turn delays final resolution. This suits neither the victim nor the insurer.