The Lord Chancellor, David Gauke, has announced a change to the discount rate – increasing the rate from minus 0.75% to minus 0.25%.

What is the discount rate?

The discount rate is a notional percentage applied in cases of significant value - serious injury claims - to estimate the interest an injured person might earn on their compensation. The lump sum is ‘discounted’ to take into account the potential return so that the injured person is appropriately and not over compensated for their injury.

For a decade, the discount rate stood at a ludicrously high 2.5%. This was a return our clients were never going to achieve when investing their lump sum award unless they looked to use high-risk investments. Understandably – as the award was for life and every penny allocated to a specific need – they needed low-risk options to ensure as much of their money was available for as long as they needed it.

What does the announcement mean?

As the leading claimant-only personal injury firm, we always want to see those we represent receive as much compensation as possible for their injuries.

Whilst last week’s announcement does mean a marginal increase to the discount rate, things could have been far worse. As we previously pointed out, in the build-up to the announcement insurers had been pushing for a much higher discount rate of between 0 to 1%. This would have meant millions lost for those injured through no fault of their own. It would have resulted in under compensation in real terms, and of course significant profits for the insurance industry.

We are pleased that the Lord Chancellor has not caved in to their demands.

The government has acknowledged that seriously injured people are risk averse when it comes to investments and deserve full compensation.

"The reaction of the insurance industry has been to portray a considered announcement, which seeks to achieve fairness for the most seriously injured avoiding them falling back on the state when their inadequate funds run out, as encouraging poor investment and leading to over compensation."

Samantha Hemsley
national head of the serious injury and clinical negligence team at Thompsons Solicitors

This speaks volumes about how out of touch insurers are and is depressingly true to type. Insurers’ relentless drive for profit appears to render them incapable of the humanity required to stand in other people’s shoes.

Our seriously injured clients were under compensated for years due to a discount rate of 2.5%, a reality that contributed to golden years of insurance company profit. Insurer outrage at an outcome that doesn’t, for once, go their way is Trumpian in its attempt to gloss over the past and sets a false agenda for the future.

Every penny of a settlement award for an injured person is allocated to a specific need – a cost that will be incurred. Claimants do not invest to make money, they invest to ensure their money will last and be sufficient to meet the costs of essential care for life. Awards are made on the basis that the money will be invested and spent.

Insurers rarely, if ever, remain in contact with claimants post settlement. We do. They have no sense of what a seriously injured person’s life looks and feels like. I have seen no evidence upon which they could possibly base the conclusion that those injured seek to make a profit on their losses. It is baseless conjecture and a transparent attempt to advance a narrative that will influence the next five-year review and bolster their already enormous net profits.

The real answer is for insurers to use periodical payment orders, also known as PPO’s, in settlements. That would make the level of the discount rate irrelevant. But, in case after case, where we propose it they refuse because finality and getting cases off their books, ranks above anything else.