Injury Claims

The impact of Government Changes to the compensation received by victims of life-changing injuries.

On 27th February 2017, the Lord Chancellor made an important announcement in respect of the Discount Rate which is used as part of the calculation to determine the amount of compensation to be paid to seriously injured individuals.

The significant change to the Discount Rate is one which affects the insurance industry as a whole, as well as businesses buying insurance and claimants.

What is the Discount Rate?

The Discount Rate, also known as the Ogden Rate, forms part of the calculation to determine the level of award in respect of cases involving serious injury.

Claim settlements for injury are made up of a number of key components: * compensation for pain and suffering * future loss of earnings * future cost of care * ‘other’ financial support, either towards activities that cannot be performed as a result of the injury (i.e. driving, caring for dependents etc.) or the provision of additional support, such as prosthetics * legal and professional fees

When assessing future loss of earnings, the courts multiply the amount they consider the claimant will lose each year by factors such as their age and their projected mortality rate. Similar factors are applied to the amount required for future cost of care.

In the case of serious injury, the amount allocated towards loss of earnings and future cost of care can be high, as the settlement is designed to provide financial indemnity over a number of years. When such an award is made in a lump sum, it can therefore equate to a considerable amount of money.

As a result, an allowance is made by the courts in respect of future losses to reflect the fact that the claimant will be able to invest the lump sum awarded and earn interest on that investment over a period of time. The settlement is therefore ‘discounted’ by the amount of interest the claimant can expect to earn over that period. It is this adjustment which is known as the Discount Rate and that is subject to the recently announced changes.

The Discount Rate is linked to returns on low risk investments, typically Index-Linked Gilts.

What has changed?

The Government has changed the Discount Rate from 2.5% to -0.75%. This means that, rather than any lump sum award being discounted to allow for a 2.5% investment return, the indemnity settlement will be increased, reflecting a decision that over the long term there is predicted to be a negative return on investment.

The effect of this change will be to increase the value of claims for future financial loss. The change is most significant for younger claimants, for whom the settlement needs to cover the greatest length of time.

Why has the rate changed and when does it take effect?

The Discount Rate hadn’t been adjusted since 2001, despite interest rates falling during that time. The yield on gilts and government bonds, particularly, has fallen during this time.

The recently announced reduction in the rate is designed to reflect the fact that less investment income is available today compared to when the rate was last adjusted, and has been introduced to ensure that claimants are more appropriately compensated over the remainder of their lives.

This will apply to all claims settled in England and Wales on or after the 20 March 2017 and Scotland on or after the 28 March 2017, regardless of when the loss was incurred or notified.

What are the implications of the change on a claim settlement?

As mentioned above, the Ogden ‘Discount’ rate was set at a level to help ensure that when an injured person was paid today compensation for a loss of wages or for care that might be needed 30 or 40 years from now, the amount of that loss was discounted by an amount to allow for the interest they would earn before that money was actually needed. The concerns that inflation is higher than investment returns on ‘Gilts’ mean that instead of a discount, a small loading will instead apply. The difference between 2.5% and -0.75% doesn’t sound that much but here’s an example of how it could work in practice where rest of life care is determined to be £100,000 per year.

Which lines of business / products are affected by the changes?

The Discount Rate applies to injury claims, so although Property risks should be little affected, any product which provides cover for Liability (Employers’ Liability and Public & Products Liability) or Motor will be impacted.

Insurers will have to ensure that today’s prices reflect the cost of claims in future years, which are now going to be significantly higher than they previously were. We will ensure however, that any increases will be kept in line with the wider market and that disruption to you will be kept to a minimum. Large losses are much more difficult to predict than small to medium ones. Previous claims history isn’t always an indicator of your likelihood to incur a significant claim in the future. Unfortunately, unpredictable accidents happen in all industries including those which are perceived as low risk.

Do Businesses need to increase their levels of Insurance Cover?

The largest injury claim in the UK currently stands at £23m for a Personal Injury claim involving life changing injuries to a 13-year old girl.

Our advice, is to review your levels of cover and consider appropriate increases to protect against future shortfalls that could leave your business seriously exposed.

  • Employers are required by Law to take out Employer’s Liability insurance with a minimum limit of £5m, however, the Insurance Industry has offered £10m as standard for many years. This level of cover could now be insufficient in view of the changes to the discount rate and accidents involving multiple staff.

  • There is no statutory requirement for Public Liability insurance, however most businesses commonly carry a £5m limit. This level also looks more likely to be breached now.

Act now to protect your business and contact your Darwin Clayton representative to discuss options for increasing your levels of cover.