The Discount Rate in Personal Injury Claims: What, Why and How
On 15th July 2019 the Government announced a change to the calculation of personal injury compensation. From 5th August the “discount rate” applied in compensation calculations will be raised from -0.75% to -0.25%. The announcement has been met with slight relief by those acting for Claimants and with displeasure from insurance companies who are, in the main, the ones left footing the bill in the majority of personal injury claims. This article aims to explain the purpose of the discount rate and why changes to it are both significant and contentious.
The Discount Rate
Many personal injury claims include a figure for future losses such as the cost of future care and loss of earnings. Even though a successful Claimant will recover their damages at the conclusion of a claim, the future losses may spread many years into the future. Therefore, a lump sum award of damages paid to a Claimant needs to take this into account.
A crucial principle in the assessment of damages in personal injury claims is that the Claimant should be put, as far as possible, back into the position they were in before the injury was sustained. A successful Claimant should not suffer a detriment due to the negligence of another but neither should they benefit from that negligence. This may seem a strange concept when a case may well involve an innocent person suffering catastrophic injuries at the hands of a complete stranger, but it is one that runs through the law on damages and is upheld by courts as far as possible.
Clearly, a Claimant receiving an award of damages to cover future losses will very often receive their lump sum damages payment before the money actually needs to be spent. This accelerated receipt of the money means that a prudent Claimant could, for example, invest their award so that a large amount of interest is earnt on it during periods of high interest rates. However, if inflation rates are such that the damages award is quickly devalued, they will not be left with enough money to pay for the future expenses the compensation was intended to cover.
In order to try and account for these eventualities, the discount rate is applied to a lump sum award of damages in an attempt to reflect the likely interest that a Claimant’s award of damages will earn if it is invested. Necessarily, a precise calculation cannot be made but a method of calculation is used which is accepted by the courts as being a generally fair approach.
How is it Applied?
When an award of damages is made it is calculated using what is known as the “multiplier” and the “multiplicand”. The multiplier and multiplicand are multiplied together in order to determine the sum to be awarded.
The multiplicand is essentially the future loss that the Claimant expects to suffer, for instance their likely annual loss of earnings. The multiplier is a figure which represents the number of years for which the Claimant is to suffer the loss, for example the number of years they expect to be out of work as a result of the negligence.
The multiplier, however, is not an actual number of years because were it to be the Claimant would benefit from the accelerated receipt of the money and would then be overcompensated for their loss.
An example would be Claimant A who at the age of 20 was earning £20,000 a year but receives catastrophic injuries in a car accident. She is unable to work for the rest of her life and so has, potentially, 50 years’ worth of lost earnings. Were she to receive 50 years’ worth of lost earnings at the age of 20 she would receive a lump sum of £1,000,000 which if invested would provide an annual income of far more than £20,000.
Therefore, the multiplier is an artificial figure which aims to take account of accelerated receipt but also of the uncertainties that everyone faces in life (the risk of redundancy, ill health and a change of lifestyle over the course of a lifetime). It is calculated by reference to key characteristics of the Claimant (including their educational achievements, type of employment and their age at date of injury).
The calculation of the multiplier is made with reference to the Ogden Tables which are actuarial tables setting out the multipliers that should be used for different categories of Claimants, based on statistical evidence approved by the government. The Ogden Tables were given formal approval by the House of Lords in the case of Wells v Wells [1998] 1 AC 345 and are admissible in evidence.
The latest edition of the Tables is the 7th edition and can be found online at
Once the multiplier is selected from the Ogden Tables, a further calculation is then undertaken in order to reflect the likely return on the investment of the lump sum were it to be invested by a risk adverse and prudent Claimant. It is at this stage, and for this purpose, that the discount rate is applied to the multiplier.
The lower the discount rate, the less money will be “discounted” from the Claimant’s award which means that a higher discount rate is better for Defendants.
Why the Change in the Discount Rate?
Prior to March 2017 the Discount Rate was set at 2.5% and had been since 2001. The 2.5% figure reflected the state of the economy in 2001: relatively healthy and with a Bank of England base rate of interest of 4%. This meant that a lump sum invested in 2001 would earn healthy interest, justifying a large discount rate. Essentially the assumption was that an investment would, over its lifetime, earn around 2.5% above inflation.
However, by 2017 interest rates had fallen dramatically meaning that Claimants investing lump sum awards were earning minimal interest. The state of the economy was such that it could no longer be assumed that investments would grow and in fact the risk was that the value of investments would fall over time. Therefore, awards discounted by 2.5% were then sitting in accounts attracting minimal interest and often decreasing in value. As a result, Claimants were often grossly disadvantaged.
In 2017 the Discount Rate was lowered to -0.75%, a move that was welcomed by Claimants as it led to higher awards (because less money was discounted from their compensation awards). Those acting for Claimants also welcomed the change and saw the reduction as recognition that, for too long, Defendant insurers had been undercompensating Claimants. Predictably however, Defendants and their representatives took a different view and argued that the change in the Discount Rate would increase insurance premiums for both personal and business customers. Defendant insurers lobbied for change and it was revealed by Allianz UK that its profits in the year following the reduction of the Discount Rate were £22 million less than they would have been had it not been for the reduction. It was also estimated that the NHS would incur an additional £1 billion per annum on damages awards.
However, it is of course the case that awards are made in recognition of negligence which will have, in the main, occurred without any wrongdoing on the part of the Claimant. Claimants are entitled to recover damages that fairly compensate them for the injuries they have sustained. Claimants have been held by the courts to be risk adverse investors who may well, if their injuries are severe, have to rely on a compensation payment for the rest of their lives. The government, in reducing the Discount Rate from 2.5% recognised these factors and rejected the argument put forward by Defendants that the average Claimant is to be expected to invest their money in higher risk, high return investments.
The latest change to the Discount Rate means a slight raise from -0.75% to -0.25%. Therefore, and whilst it will lead to savings for Defendant insurers (estimated to be between £230m and £300m) it is not quite as much as they had hoped for and still leaves Claimants in a far better position than they had faced before March 2017.
Announcing the increase to -0.25%, the Justice Secretary David Gauke (who only days later lost his position due to the Johnson cabinet reshuffle) stated that “It is vital victims of life-changing injuries receive the correct compensation – I am certain this is the most balanced and fair approach following an extensive consultation”.
What Next?
The recent change to the Discount Rate was prompted by the Civil Liability Act 2018 which came into force in December 2018. It provided for a review of the Discount Rate with a deadline of 6th August 2019 to announce any new rate.
Thereafter, there will be reviews no more than 5 years apart, with the intention that the Discount Rate will keep step with changes in the economy and investment markets. Therefore, and whilst Defendant insurers will no doubt remain unhappy with the newly announced Discount Rate, they are likely to remain in a far better position than Claimants had been until the 2017 change.
On a practical level, the regular reviews of the Discount Rate will arguably lead to some uncertainty amongst parties to litigation particularly when one remembers the time it can take to conclude complex personal injury claims. Advisers will have to explain to potential Claimants that by the time their claim concludes, the Discount Rate may well have changed meaning that any damages award could be considerably more, or less, than it would be if the claim was settled immediately.
For Claimant firms, any significant increases in the Discount Rate could well lead to levels of under-compensation that make it unprofitable for firms to take on certain types of cases, meaning that increasing numbers of Claimants could go unrepresented.
Nevertheless, the recognition by Parliament that regular reviews are required at least will ensure that both Claimants and Defendants will not be taken by surprise and that they will have ample opportunity to advise clients of possible changes to the rate.