In July of last year, the former Lord Chancellor and Secretary of State for Justice, David Gauke MP, revealed that the new personal injury discount rate (PIDR) would be (-)0.25%, commencing 5 August 2019.
This announcement concluded the ‘first review’ of the current ‘periodical review’ procedure (as legislated by Schedule A1 of the Civil Liability Act 2018), which governs PIDR calculations moving forward.
We analysed the impact of the revised rate in edition 280 of BC Disease News (here).
Why is the PIDR so important?
Principally, it affects the magnitude of lump sum damages awards to PI claimants with serious (and often fatal) injuries.
The PIDR adjusts multipliers, sourced in the Ogden Tables (hence why the PIDR is commonly referred to as the ‘Ogden’ rate), which are then applied to present day valuations of defined (or undefined) terms of future annual losses.
Accounting for the risk of investing damages, along with taxation, expenses (investment management costs), inflation on returns and general ‘wider economic factors’, the purpose of the PIDR is to provide full compensation for claimants in a fluctuating financial environment. Thus, the PIDR should reflect funds estimated to be accrued or lost before a claimant exhausts their compensation.
For 16-years (since 2001), the PIDR had been set at 2.5%, i.e. lump sum awards were reduced by the PIDR, on the basis that claimants were investing their damages in higher risk portfolios.
However, in 2017, the then Lord Chancellor, Elizabeth Truss MP, reduced the PIDR to (-)0.75%, i.e. lump sum awards were increased by the PIDR, owing to the belief that claimants were investing their damages in ‘very low-risk’ portfolios.
As far as the insurance industry was concerned, there were genuine concerns that the negative PIDR put claimants at risk of being ‘substantially over-compensated’.
Having lobbied the Government for imminent change, the industry was led to believe that the more ‘reasonable expectation’ of claimants practising ‘low-risk portfolio’ investment, as opposed to ‘very low-risk’ investment, would suit a PIDR lying somewhere between 0% and 1%.
Unsurprisingly, the Association of British Insurers (ABI) was disgruntled over the meagre extent to which the PIDR rose, last summer. Director-General, Huw Evans, described the rate change as a ‘bad outcome’, as it preserved ‘the fiction that a claimant and their representatives will knowingly choose to invest their damages in a way that would guarantee losing them money’.[i]
In a letter to the acting Lord Chancellor, the ABI’s Director of General insurance Policy, James Dalton, further termed the decision ‘misleading and wholly disingenuous’, as the Impact Assessment neglected to mention ‘the steps taken by Government to guide both insurers and lawyers to assume a rate of between 0 and 1% and indeed to start to use it in practice’.[ii]
Subsequently, in edition 282 (here), we reported that the ABI had been considering a judicial review challenge of the (-)0.25% PIDR, on the premise that it had been ‘miscalculated’.
However, we can now divulge that the Association has scrapped any and all plans to commence legal action against the Government.[iii]
Contrary to the perceived view that the ABI backed down and simply accepted the status quo, Mr. Dalton maintained, in a recent statement, that:
‘... the decision by the former Lord Chancellor to set the personal injury discount rate at -0.25 percent was misguided and incorrect. It represented a material departure from the principle of awarding 100 percent compensation ... We considered carefully whether to apply for a judicial review of the decision, however we were mindful of the uncertainty and delay that would have been created in individual personal injury cases as a result and so decided not to proceed’.[iv]
It appears that the scope for legal challenge was also frustrated, safe in the knowledge that Civil Liability Act reforms afford a more robust framework than the preceding Ogden regime.
[i] ‘ABI responds to personal injury Discount Rate announcement’ (15 July 2019 ABI) <https://www.abi.org.uk/news/news-articles/abi-responds-to-personal-injury-discount-rate-announcement/> accessed 7 January 2020.
[ii] ‘Discount Rate Impact Assessment “misleading and wholly disingenuous”’ (19 July 2019 ABI) <https://www.abi.org.uk/news/news-articles/2019/07/discount-rate-impact-assessment-misleading-and-wholly-disingenuous/> accessed 7 January 2020.
[iii] Neil Rose, ‘ABI drops discount rate judicial review threat’ (17 December 2019 Litigation Futures) <https://www.litigationfutures.com/news/abi-drops-discount-rate-judicial-review-threat> accessed 7 January 2020.
[iv] Laura Board, ‘ABI will accept “misguided” Ogden rate change’ (10 December 2019 Insurance Insider) https://www.insuranceinsider.com/articles/130517/abi-will-accept-misguided-ogden-rate-change> accessed 7 January 2020.