Personal injury lawyers say the change to -0.25% ensures injured people receive a fair amount of compensation
As insurers lament the Ogden rate change announced today, personal injury lawyers have praised the decision.
While insurers have complained that Lord Chancellor David Gauke MP’s decision to reset the discount rate to -0.25% from -0.75% didn’t go far enough, the Association of Personal Injury Lawyers said the rate ensures injured people receive a fair amount in compensation.
APIL president Gordon Dalyell said: “We welcome the Lord Chancellor’s decision to set the discount rate at minus 0.25 per cent, after uncertainty about the impact of the Government’s new approach of setting the rate on the basis that injured people should be considered ‘low risk’ investors.
“The Government has faced sustained pressure from the insurance industry to set a rate which would not be appropriate for injured people, who should not be forced to take any risk with their investments.
“We must remain vigilant that this new rate does provide them with the fair compensation they need and deserve.”
Stuart Hanley, deputy head of Minister Law legal services, said that the decision by Gauke was a “humane” one.
He added: “Although a revised upwards rate at minus 0.25% will reduce compensation payments (previously -0.75%) the new rate does reflect the fact that the government accepts it is a risky and costly business for claimants to invest their compensation successfully in order to fully fund the enormous changes in their lives following serious injury.
“The revised rate also mirrors the likely outcome of the Damages Act in Scotland, where we understand the Scottish government is due to confirm a -0.25% rate, ensuring there is a level playing field across the UK.
“In 2017, when Liz Truss MP, then Lord Chancellor, re-set the discount rate at -0.75%, she stated: ‘The law makes clear that claimants must be treated as risk averse investors, reflecting the fact that they are financially dependent on this lump sum, often for long periods or the duration of their life.’
“Striking the appropriate balance is of course a difficult task but, on balance we have always believed the system should support the injured person first and foremost, as that, in the end, is what we pay our insurance for.”
London law firm Osbournes Law too applauded Gauke for his decision.
Their head of catastrophic injury department, Ben Posford, said: “David Gauke is to be congratulated for resisting pressure from the insurance lobby to set a higher rate than this, which would simply have increased insurers’ profits at the expense of badly injured people.
“Investing damages that are needed to provide for an injured person is difficult at the best of times, and given the state of interest rates – which are likely to fall further in the event of a no-deal Brexit in particular – there was no justification for raising the discount rate any higher.”
What is the discount rate?
The discount rate, also known as the Ogden rate, governs the discount that an insurer receives when paying out claims for life-changing injuries. The pay out is a lump sum expected to cover the claimant for a lifetime. They are expected to invest it. The discount rate determines how much interest an insurer would be paying on this amount. It is deducted from the total sum to be paid.
The Association of Consumer Support Organisations, also welcomed the announcement.
“Since the financial crash, the discount rate for many years hugely favoured insurers at the expense of injured people,” said ACSO executive director Matthew Maxwell Scott. “The Chancellor’s decision to set a -0.25% rate is a sober assessment of the facts, and regular reviews will ensure that the rate can be amended every five years to take account of interest rates, investment returns and other economic data.”
Insurers had been pricing in anticipation of a the discount rate being changed to at least zero, and many have already warned this announcement could lead to increased premiums.
But Maxwell Scott said: “In making his decision, The Lord Chancellor perhaps had in mind the risk of undersettlement bringing significant future problems, including the potential risk that the state has to step in after the compensation runs out.
“The insurance industry is contracted to protect the public in the event of a serious injury, in return for which motor and many other insurances are compulsory. The discount rate must always reflect that contract, and meet the obligations of insurers to look after injured people, whatever the cost.”
On the other side of the coin though, insurance lawyers have reacted with great disappointment at the news.
BLM said that it had very recently been settling cases for insurance clients at a rate of plus 0.5% and above, and that hoped the new rate would be around that number.
Andrew Hibbert, partner and head of the catastrophic injury team at BLM said, “The newly-announced rate was intended to be a more realistic and evidence-based way of valuing injury claims with significant future losses. We haven’t yet seen the reasons for the decision, but the new minus 0.25% rate is a disappointment to us and our insurance clients.
“I am doubtful that this new rate removes the risk of over-compensation which the government itself said was significant at the previous rate of -0.75%. The more positive aspect is that the setting of the discount rate should at least remove uncertainties associated with resolving claims and should help bring cases to a close more quickly.”
The Forum of Insurance Lawyers similarly reflected this view.
Tony Cawley, member of the FOIL and partner at Clyde & Co, said: “It is very disappointing that the numerous representations made by FOIL and the insurance industry have failed to be taken into consideration.
“Although the Lord Chancellor refers to the new statutory test in the announcement, FOIL does not believe that the new rate reflects how claimants actually invest their damages. Today’s new confirmed rate will be particularly concerning to the insurance market generally but also to many public bodies. ”
Kennedys partner Mark Burton, said the decision risks continuing overcompensation. But he said the decision at least brings some certainty for the foreseeable future.
He said: “From a claims-handling perspective, parties can at least now engage with more certainty during the next five-year review cycle. Practitioners deserve a lot of praise for the creative ways in which they have continued to settle cases whilst awaiting a resolution.
“The new statutory process of regular reviews should ensure that the market does not experience similar disruption again.”