The Discount Rate: what you need to knowJames Arrowsmith

Learning Objectives

• What has changed• Impacts on injury claims.• Which claims will be affected.• Impacts of the change• Claims behaviours which may emerge• The future of the discount rate

Present capital value

• £100,000 care per annum for 10 years.• How much should the claimant get to cover this?

0

100000

200000

300000

400000

500000

600000

700000

800000

900000

1000000

1 2 3 4 5 6 7 8 9 10 11

The discount rate

• “the court shall…take into account such rate ofreturn … as may …be prescribed by…the LordChancellor” (Damages Act 1996)

• Wells v Wells 1999– principle of full compensation– Index Linked Government Stocks (‘ILGS’) yields

• Set at 2.5% in 2001 by Lord Chancellor

The New Rate

• The Damages (Personal Injury) Order 2017• Rate of minus 0.75%• Effective from 20 March 2017

What losses are affected?Unaffected Affected

General Damages

All Past losses

Immediate future loss (eg treatment)

CRU liabilities

Future care

Future earnings

Deferred payments ( eg treatment)

Pension losses

Cost of an alternative home

Dependency claims following fatalaccidents.

Lump sum awards (eg handicap onthe labour market)

Litigation costs

Claims that will not be affected

• Claims not relating to injury or fatal accidents

• Claims involving only injury and/or past losses

• In general, little impact on claims reserved under£100,000.

• Most liability claims will not be affected

Impact: example

• Female, £250,000 care pa for life:

2.5% Minus 0.75% Change

Age 30 £7.7 million £19.2 million + 150%

Age 50 £6.0 million £11.4 million + 90%

Age 70 £3.7 million £5.4 million + 46%

Ongoing losses

• Care, earnings, case management, deputy,therapy, transport, dependency.

• For example, a 30 year old female:

Discount Rate 2.5% Minus 0.75% % change

Care/CM £250kpa

£7.7 million £19.2 million + 150%

Earnings £30k pa £0.6 million £1.1 million + 83%

Deferred losses

• Future surgery, pension, deterioration leading tocare or loss of job.

• A hip injury will lead to replacement surgery in 20years with a £20,000 loss:

Discount Rate 2.5% Minus 0.75% % change

Total £12,200 £23,200 + 90%

Accommodation

• The rate change calls the current approach(Roberts v Johnstone) into question.

• Theoretical and practical issues to be addressed.

• Anecdotally settlements are occurring with no sumfor accommodation

Impact on a claims portfolio

£-

£5,000,000.00

£10,000,000.00

£15,000,000.00

£20,000,000.00

£25,000,000.00

£30,000,000.00

£35,000,000.00

Value pre rate change

at 2.5%

at minus 0.75%

Impact on a claims portfolio

£-

£5,000,000.00

£10,000,000.00

£15,000,000.00

£20,000,000.00

£25,000,000.00

£30,000,000.00

£35,000,000.00

Value pre rate change

at 2.5%

at minus 0.75%

Impact on a claims portfolio

£-

£5,000,000.00

£10,000,000.00

£15,000,000.00

£20,000,000.00

£25,000,000.00

£30,000,000.00

£35,000,000.00

Value pre rate change

at 2.5%

at minus 0.75%

Policyholder impact

£-

£5,000,000.00

£10,000,000.00

£15,000,000.00

£20,000,000.00

£25,000,000.00

£30,000,000.00

£35,000,000.00

Value pre rate change

at 2.5%

at minus 0.75%

Immediate steps in claims

• Re-pleading and re-reserving

• Escalation and check limits of indemnity

• Review and revise offers

Claim behaviours

• Dependant on trial date – possible further change

• Consider settlement strategy (now or later)

• Increased scrutiny on long term prospects – lifeexpectancy and timing/quantum of deferred loss

• Impacts assessment of periodical payments

Further reform

• Statement to the Stock Exchange promised afurther consultation on methodology prior to Easter

• Hammond acknowledged the need to balanceclaimant and consumer interests

• Politically the expectation is for an increase.

Process

• Consultation paper

• Time for response

• Prison and Courts Bill 2017

• When and how much?

Questions

James ArrowsmithE: James.Arrowsmith@brownejacobson.comT: 0121 237 3981

All information correct at time of production.

The information and opinions expressed within this document areno substitute for full legal advice. It is for guidance only andillustrates the law as at the published date. If in doubt, pleasetelephone us on 0370 270 6000.

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