What is the Personal Injury Discount Rate?
When assessing lump sum awards for personal injury claims, account is taken of the net rate of return (discount rate) the claimant might expect to receive from a reasonably prudent investment of lump sum compensation. The current rate of 2.5% was set in 2001 and reflects the gross redemption yields of Index-Linked Government Gilts.
What are the changes?
The Lord Chancellor has confirmed her decision to reduce the discount rate by 3.25 points to -0.75%.
The Lord Chancellor has previously conceded that any change could have “profound financial consequences”. The revised rate will apply with effect from the 20TH March 2017 and will apply retrospectively to all current claims, as well as new incidents.
Who is affected by the ruling?
The new discount rate ruling has significant implications for insurers in respect of the potential additional costs relating to personal injury claims relating to Motor and Casualty (Liability) risks.
Existing reserves on open claims will need to be increased to reflect these changes.
Impacts to Commercial Policyholders
The reduction in the discount rate will particularly affect large personal injury claims settlements.
For example:
A thirty year old female is disabled due to an accident and cannot work again. She has no educational qualifications and it is determined she would have earned £20,000 a year until retirement at 65. Rest of life care is determined to be £100,000 a year.
Under the current 2.5% discount rate the total sum award (consisting of Loss of Earnings and Costof Care) would result in a lump sum award of £3,414,350.
With the new discount rate of -0.75% this would increase to £8,480,400.
Indemnity limits on Liability policies
The record level for a court award in the UK currently stands at £23,000,000 – this was made in 2012 and was based on the previous discount rate.
Bearing in mind the increases that the reduced rate will inevitably produce, we therefore feel that it is prudent to reconsider the adequacy of the limits of cover carried under both your Employers and Public/Products liability policies.
Clearly the greatest impact will be to those commercial policyholders with higher potential for large injury claims, as these costs will be disproportionately affected by increases in large awards resulting from the Discount Rate reduction.
The Way Forward:
You need to review your current Limits of Indemnity in respect of both your Employers Liability and Public/Products Liability covers, to ensure these are adequate.
We would recommend that any company now takes minimum limits of £20,000,000 for Employers Liability and £10,000,000 for Public/Products Liability.
However, these are only our recommendation for the minimum limits you require and companies with increased exposures should consider taking even higher limits.