An unexpectedly large change to the discount rate, which determines compensation payments for those suffering life-changing injuries, has thrown the insurance markets and their legal advisers into disarray.
Campaigners have long been arguing for changes to the ‘Ogden rate’, the mechanism allowing courts to fairly price catastrophic injury compensation payments to support pursuers financially throughout the remainder of their lives. The proponents of change had said the low interest environment had left pursuers with potential shortfalls in their compensation and that the assumptions around inflation-protected growth were flawed. The courts argued that professional advice was not required on the basis the investor could simply buy government-backed index-linked gilts which would provide an inflation-proofed return. However, as has been the reality for many years, the purchase of index-linked government gilts invariably leads to a capital loss in order to compensate for the very attractive index-linked income the product provides.
Now, after many years of calling out in a seemingly barren wilderness, campaigners have been rewarded with the Lord Chancellor announcing a reduction from +2.5% to -0.75%; a change significant enough to potentially double the value of compensation awards overnight.
So what does this mean?
What might first appear to be a small change will have a dramatic effect on those pursuing financial compensation following a catastrophic personal injury. As many large-value payments are intended to provide compensation over many decades, small changes to the calculation basis can have a big effect. For example, a 30 year old woman who needs £50,000 a year to cover ongoing care costs would receive around £3.8m using the new rate compared with a lump sum payment of £1.5m at the previous rate.
Insurers, for whom the rate change was unanticipated, immediately launched a campaign for change, fearful of rocketing compensation awards. However, many argue insurers should not be complaining about a change that benefits pursuers, saying they need to be careful not to damage their own reputations by complaining about legitimate settlements, with some suggesting it makes insurers appear heartless.
After the immediate furore, the Ministry of Justice announced a 6 week consultation to decide whether to change the legal framework that sets the discount rate. As a result, there will be no immediate change. The consultation ran until 11th May and the government said it will publish its response to that consultation by 11th August; it remains to be seen whether the election result delays that date.
The consultation is looking to settle the questions around the discount rate for the long-term and raises many important points of principal. By opening up the possibility of more regular reviews, for example, it suggests creating a more flexible and nuanced regime that better reflects the economic environment.
Importantly, the consultation must not be about denying injured people the compensation they need, while at the same time ensuring pursuers are not over-compensated. A balance must be struck.
In summary, the changes announced will dramatically increase financial settlements resulting in an increased quality of life for those suffering life-changing events outside of their control; hopefully the goal for all involved.