Discover the new compensation rate effective January 11, 2025. This single rate approach offers relief to compensators while simplifying the process for all parties.
The Lord Chancellor, Shabana Mahmood, has set the applicable personal injury discount rate for England and Wales at +0.5% effective from 11 January 2025.
The amendment will be welcomed by defendant insurers and indemnifiers but is, perhaps, not the extent of shift that had been anticipated. Historically the rate in England and Wales has been greater than that in Scotland and Northern Ireland, where +0.5% rates were recently adopted, and, notably in 2023 the Isle of Man implemented a +1% rate. Many compensators would have hoped for a similar outcome.
In setting the new rate the Lord Chancellor was required, pursuant to the Civil Liability Act 2018, to have regard to the actual returns that are available to investors; the actual investments made by investors of relevant damages; the appropriate allowances for taxation, inflation and investment management costs; and assume an investment portfolio of “more risk than very low risk” but still less risk than an ordinary prudent investor.
In reaching the new rate, the Lord Chancellor moved away from previous analytical assessment of investment decisions, returns, and expenses of a single representative claimant (over a 43-year term) and, instead, considered the size and term of damages awards, investment strategies, and other taxable income for three core claimant types investing over 20, 40 and 60 years.
Investment returns for the three core claimant types were calculated to range between CPI+2% and 3.8%; deductions for inflation on damages was determined to be CPI+1%; and management and taxation costs were calculated to range between 1.2% and 1.8%.
Whilst recommended by the expert panel to set a rate between 0.5% and 1%, the Lord Chancellor, felt the risk of under-compensation was too great at rates above 0.5%. In applying a margin of prudence and setting a rate of 0.5% the Lord Chancellor is satisfied that all three core claimant types have at least a 55% chance of receiving full compensation (the Wells v Wells 100% compensation principle) and no more than 25% chance of being under-compensated. Interestingly two of the three core claimant types have a 40% chance of being “significantly overcompensated” (120% compensation) at the 0.5% rate, but the Lord Chancellor is content with this level of risk to ensure the chances of under-compensation are limited.
The upward revision of the discount rate to 0.5% is estimated to save insurers around £150,000,000 per annum and public bodies (e.g. the NHS/NHS Resolution) approximately £200,000,000 per annum.
An example of the impact on damages and compensator outlay can be starkly seen here (figures rounded):
|
£50,000 per annum loss |
Applicable Rate |
|
|
Male claimant aged 5 |
-0.25% |
+0.5% |
|
Loss for life |
£4,600,000 |
£2,800,000 |
|
Loss for 30 years |
£1,600,000 |
£1,300,000 |
|
Male claimant aged 30 |
|
|
|
Loss for life |
£3,000,000 |
£2,100,000 |
|
Male claimant aged 50 |
|
|
|
Loss for life |
£1,800,000 |
£1,400,000 |
Comment
The new rate, whilst not upwardly increased to the extent that many commentators had anticipated, will still be welcome relief to compensators. Furthermore, maintaining a single rate rather than dual/multiple rates (the expert panel did not recommend the latter approach as the benefits did not outweigh the additional complexity and expense) will satisfy both claimants and compensators who were lukewarm to the proposal. The new rate will come into force on 11 January 2025 and must be reviewed again within 5 years.
For more information contact our insurnace solicitors