National head of serious injury and clinical negligence Samantha Hemsley shows how injured people will lose out and insures will reap millions following the discount rate review
At the same time as the personal injury discount rate is under review, two major UK companies have predicted the changes will bring them significant pre-tax profits. It is hard to think of a more cynical example of profiteering at the expense of those injured.
The discount rate is applied in a serious injury case to any future loss element of a lump sum award (say for future care costs or wage loss). The discount is meant to ensure that the injured person is appropriately, not over, compensated and involves the Parties or the Court reducing the amount to take into account interest the injured could make from investing the money.
For ten years up to 2017, the rate applied by the courts that it was assumed an injured person would earn from their lump sum was 2.5%. The impact of a level of supposed return could cut by as much as half what an injured person could get – there are some calculations at the end of this article from a very serious case to show the impact of varying rates of interest.
After the market crash of 2008 no one was earning 2.5% on their savings, yet for ten years until 2017 the insurers were able to take that off every seriously injured person’s damages and they were left to struggle on – usually getting less than 1% in reality.
For 10 years the insurers banked the difference, knowing that the rate it was ‘assumed’ injured people would get bore no resemblance to reality. If the money ran out the State picked up the bill for care and for benefits after the insurers had closed their files and walked away.
In 2017 after years of campaigning the government bowed to the inevitable and announced that the new discount rate would be -0.75%. However, the insurers screamed blue murder and within 24 hours had a meeting with the Minister of justice and the Chancellor of the Exchequer. The government backtracked and now, following the Civil Liability Act 2018, the rate is back under review - with insurers and claimants set to gain or lose millions depending on the outcome.
"This is another classic example of insurer fat cats bullying and manipulating to get their way at the expense of the injured."
To injured people the discount rate really matters, to insurers its zeros on a balance sheet. In their pre-tax profits for the year ending 31 December 2018, published this month, UK insurers Admiral Group and Aviva plc have both predicted significantly higher year-end profits based on their hope the discount rate will move from -0.75% to 0% in August.
Admiral Group are saying that a change of 0.75% could lead to a £66 million increase in profits, while Aviva plc anticipate the change would deliver them a non-operating profit of £190 million.
The figures in both these insurers’ results show what is really going on here and give the lie to the myths the insurance industry have been peddling about the discount rate for years.
They cried wolf following the change to the discount rate in 2017, claiming the change from an assumed 2.5% to a more realistic -0.75% would bankrupt the industry and yet these figures show this was clearly nonsense. The industry has raked in millions for years whilst the discount rate bore no relation to what was really available as interest on savings and was at least 2% away from reality. Now they admit that a mere 0.75% change will make millions in extra profits.
Thompsons Solicitors campaigned against the old discount rate of 2.5% and continues to oppose changes to the new rate of -0.75%. We say that any changes must always place the needs of the victims of injury at the heart of the assessment and ensure that those injured through no fault of their own get full compensation for their losses.
Even now, insurers are cynically trying to delay cases involving our clients to avoid having to pay them at the discount rate of -0.75% – hoping that it will change again in their favour. Where that happens we will expose the insurers’ behaviour and seek to settle at the current rate.
This is another classic example of insurer fat cats bullying and manipulating to get their way at the expense of the injured.
The impact to those injured
Below is an example of the impact any discount rate change could have, using a serious injury case with a future loss of £21million:
- Changing -0.75% to 0%, would see the court reduce the £21 million to about £18.5 million
- Changing -0.75% to 1%, would see the court reduce the £21 million to about £16 million
- Using the 2.5% that applied for 10 years would see the court reduce the £21 million to about £12.9 million
Nothing has changed about this injured person’s needs and nothing has changed about the costs they will incur, yet the impact of those changes on what they will have to invest for their future is huge.
A large amount of the compensation sum in a case like this is often to pay for extra assistance in the form of care workers. If you accept the reality of Brexit and staff wages growing faster than inflation, then the eventual award is going to be eaten up far quicker than the courts are allowing. This means the injured person may be tempted by more risky investments that offer a higher return but, as their name suggests, are not as safe.