How will the increase impact personal injury claims settlements in Scotland and Northern Ireland?
The increase in the rates for Scotland and Northern Ireland is welcome news for public sector organisations and insurers. An increase in the discount rate means personal injury claims settlements will reduce, reflecting the higher investment returns that can be achieved when a settlement is invested.
This may also have a knock-on effect for insurance premiums. Where cover includes personal injury claims, for instance public liability, employers’ liability and motor insurance, a higher discount rate will lead to lower costs for insurers. This could be passed on through reductions in premiums, although expectations of a rate rise mean this is likely to have been factored in already either directly, or indirectly via reduced inflationary pressures.
What about the rate for England and Wales?
The Government started its review into the personal injury discount rate for England and Wales in July 2024. This review must report within 180 days, so the findings and any new rate should be revealed no later than 11 January 2025.
The announcement of higher rates for Scotland and Northern Ireland gives a good indication of the direction of travel for the rate for England and Wales.
Parity across the three jurisdictions could be an outcome, making the damages system simpler and fairer. However, it’s also worth noting that England and Wales base its discount rate decisions on a different – and slightly more risky – notional portfolio of investments. This could potentially lead to a slightly higher discount rate in England and Wales.
And, while dual or multiple rate systems have been mooted in government consultations, it’s unlikely these will be adopted. Advice from the Government Actuary’s Department to the Scottish review indicated that these approaches could increase costs, complexity and the duration of court cases as well as requiring a long transition period.
Why is the personal injury discount rate important to public sector organisations?
The personal injury discount rate is a percentage figure used when calculating lump sum settlements for damages in life-changing personal injury cases. As the claimant receives the settlement upfront, it’s designed to factor in the likely return they could receive by investing the lump sum. The lower the discount rate, the smaller the potential investment return and, therefore, the higher the lump sum settlement.
Life-changing personal injury claims are a significant concern for public sector organisations. Accidents do happen, whether to members of the public or employees, and these individuals must be compensated.
The financial implications can be considerable. As an example, the NHS paid out more than £2.8billion in compensation and associated costs in 2023/24.
How can I prepare for potential change?
Given the increase in the rates for Scotland and Northern Ireland, it may be prudent to speak to your legal department or personal injury lawyers to determine the impact on any ongoing personal injury claims, insurance fund liabilities and future claims projections.
A new rate may also have ramifications for your insurance programme and the reserves and deductibles your organisation has in place for personal injury claims. Your insurance broker will be able to assess existing programmes and recommend changes that might benefit your organisation.
How is the discount rate set?
It was also agreed under the Civil Liability Act 2018, that a review of the discount rate should take place at least every five years. For England and Wales, this is led by the Lord Chancellor, supported by an expert panel. The rates for Scotland and for Northern Ireland are set independently by the Government Actuary.
In September 2024, the Government Actuary’s Department updated the personal injury discount rates for Scotland and Northern Ireland. Both increased to +0.50%, from -0.75% in Scotland and -1.50% in Northern Ireland, and took effect from 27 September 2024.
What’s the history of the rate?
The public sector and insurance markets were reminded of the significance of the rate in February 2017.
Although the rate had been +2.5% since 2001, the then Lord Chancellor, Liz Truss, announced that it would be cut to -0.75% to reflect the lower returns that claimants could receive.
This caused outcry from the insurance sector and other compensators. By switching to a negative rate, which implies that a claimant’s settlement would depreciate over time, damage settlements had to increase.
The size of the increase depended on the nature of the claim but, for example where it related to a young person, it had the potential to more than double the size of the settlement.
The outcry forced a change and the rate was increased to -0.25% in July 2019, which remains the current rate under review.
