From discount to premium

The announcement by Scottish ministers that, in terms of s 1(5) of the Damages Act 1996, the discount rate would change from 2.5% to minus 0.75% took effect from 28 March 2017. The discount rate is of crucial importance in calculating future losses in personal injury cases. It has changed for the first time since 2001. Those affected have often suffered life-changing injuries such as brain or spinal cord injury, or lower limb amputation; are not able to work; and require significant care.

In Wells v Wells [1999] 1 AC 345, Lord Hope said at 390 that “the aim is to award such a sum of money as will amount to no more, and at the same time no less, than the net loss”.

Future losses are calculated on a multiplicand/multiplier approach. The reduction in the discount rate will increase the multiplier, and is linked to the rate of return you would get by investing the damages in index-linked Government stocks (ILGS).

The change comes after many years of lobbying and legal pressure. It follows two Government consultations, the first of which started as long ago as November 2010. Pursuers can now have greater confidence that their damages will fully compensate them for their injuries. Damages will be calculated using a rate of return based on the economic realities of investing in no-risk, inflation-proof investments.

The most seriously injured claimants need to know that damages recovered will be sufficient to meet their care costs for their rest of their lives. Annual care costs can easily run to six-figure sums. If damages run out before the anticipated life expectancy, the burden of providing care shifts from the wrongdoer to the state. Faced with the prospect of running out of funds, many pursuers had no option but to risk their damages by investing in the equities market. As well as incurring much greater risk, such investment requires costly advice, which is not a recoverable head of claim. While claimants in England & Wales have been able to mitigate the consequences of an unrealistically high discount rate by electing to take periodical payment of damages, there remain no court rules available in Scotland. The reduction of the discount rate means that claimants can have confidence that their damages will not run out before their death, ensuring they can continue to receive the care they need.

An example

A 35-year-old suffered a spinal cord injury. Net earnings were £20,000 per year before the accident but he is now unable to work, and requires care at a cost of £150,000 per annum.

The effect is dramatic, but had the discount rate been reduced from time to time to reflect the falling returns on ILGS since 2001, any changes would have been relatively modest.

Will there be further change?

The insurance industry is pushing for further change, not only to the discount rate but to the methodology for calculating future losses. A further consultation has been announced (see p 33 of this issue) to consider options for reform, including

• appropriate future methodology;
• whether the discount rate should be reviewed more frequently; and
• whether the rate should be set by an independent body.

Scottish ministers are consulting jointly on this review of the framework. The UK Government has said it will bring forward any necessary legislation at an early stage. 

Nevertheless, if there is to be further change, it is important to remember the impact on the victim. For many years, pursuers have been significantly undercompensated. The insurance industry has labelled the change to the rate as “crazy”, stating that it will cause premiums to rise. What it fails to acknowledge is that for many years, it has benefited from undercompensating vulnerable members of society.

It is important to ensure that any methodology for calculating future losses is not assessed by reference to what a particular pursuer is likely to do with the damages, but by identifying a benchmark for all. If the change is such that the discount rate is to be measured against returns on equities, consideration must be given to whether investment costs are recoverable. Regular reviews of the discount rate are to be welcomed, but caution is required to ensure that these are not so frequent as to create instability.

In my experience, the principles underlying Wells remain valid: pursuers are not ordinary investors; they are risk averse; and they need to be protected against inflation. Any impact on the victim should be the foremost consideration, to ensure that those who suffer life- changing injuries are fully and properly compensated.