Discount Rate
How will the new discount rate affect Clinical Negligence Compensation Claims?
On the 20th March 2017, the Lord Chancellor made a decision to lower the discount rate from 2.5% to -0.75%. This blog looks at the implications of this because it is a particularly important decision for catastrophic injury claims such as cerebral palsy/brain injury.
What is the “discount rate”?
The personal injury discount rate has for more than 15 years been set at 2.5%. This means that if an injured party requires a lump sum to be paid for therapies or for equipment as examples, the cost is discounted because the assumption is that the money will be invested and by the time that the money is needed to pay for the therapy or equipment in the future, there will be sufficient money (by way of returns on investments) to pay for this.
The Effect of the Discount Rate
In any compensation claim, you could be awarded financial losses which may arise in the future. As an example, if you sustained an injury at birth and you have been diagnosed with cerebral palsy, you may well require physiotherapy for the rest of your life and you will be compensated for that.
If you are a child aged 11 and it is assessed that you will live to age 80, the assumption is that you have another 69 years where you will require money for physiotherapy. If the cost of this therapy is £10,000.00 per annum, one could argue that the claim would be for £10,000.00 x 69 = £690,000.00. However, if the injured party received this amount now, once invested, the injured party would in theory receive interest on the investment. The amount of money would therefore grow and this may well result in the injured party being over compensated. The discount rate was introduced to address this issue.
Using the example above, with a discount rate of 2.5% this would lead to the injured party receiving the equivalent of another 33.13 years rather than 69 years. This would equate to a future of £331,300.00 (£10,000.00 x 33.13). The theory behind this discount rate is that once £331,300.00 has been invested, by the time this is required, the interest which has accrued on the investment will mean that the money would grow to the equivalent of £690,000.00.
Over the years it has however been become apparent that the rate of return on investments was not achieving what was expected when the discount rate was originally set. This was resulting in injustices and under compensation to injured parties because the compensation money would run out sooner than it should. This lead to the change in discount rate.
The current discount rate has been set at -0.75%. Using the same example of an injured party requiring £10,000.00 per annum for the next 69 years, the calculation is £10,000.00 x 90.47 = £904,700.00. This is a considerable increase in compensation of £214,700.00 from the old discount rate of 2.5%.
The Impact of the Decision to change the Discount Rate
There will be a significant impact for the most serious brain injury and cerebral palsy claims. The amount of compensation the injured party will now receive will be significantly more than what would have been the case under the old discount rate. This does not mean that the injured party is being over compensated, this just means the injured party has sufficient money to pay for things like therapies, equipment and care in the future and they will be safe in the knowledge that there will be sufficient funds for the remainder of their lives.
The Future
Not surprisingly, Insurance organisations, the NHS Litigation Authority (now the NHS Resolution) as well as other Defence organisations will likely seek to challenge this change to the Discount Rate. There is some talk about the discount rate changing again already and it may be increased. Some have said that Insurers and Defence organisations are using tactics to delay the resolution of claims in the hope that the discount rate will increase so that they amount of compensation they pay for clinical negligence claims decreases.
We will just have to wait and see whether there are any further changes to the Discount Rate and if so how this will impact the claims we deal with.
If you have any questions about how the discount rate will affect your clinical negligence claim then please speak to a member of our clinical negligence team on 0113 245 8459 or by completing the enquiry form.