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Latest News Your guide to the personal injury discount rate

Your guide to the personal injury discount rate

Personal injury discount rate

What is discount rate?

Put simply, the Discount Rate is a figure used to help calculate compensation payments for high value personal injury claims. It reflects the fact that someone getting a large payment will typically invest it and is likely to receive a return on the investment.

The principle behind a personal injury payout is that it should leave the recipient in the same position financially as if the injury had never happened. Each case is different, but a typical example might include providing for lifetime medical care, ongoing access needs and loss of employment income.

It is assumed that any payout is invested, with the returns on the investment used to fund the victim’s ongoing needs. When investment returns are good, more money is regularly generated. But when investment returns fall, the money doesn’t go as far.

The higher the discount rate, the smaller the lump sum will be. Conversely, the lower the discount rate, the larger the initial lump sum payout will need to be in order to keep up with the victim’s care for the rest of their life.

When does the discount rate apply?

The rate is applied to lump sum payouts that are made as a result of personal injury claims. These can fall under motor insurance policies, public liability insurance and employer’s liability insurance.

How is a payout calculated?

The calculation can appear complicated, but in essence it’s based on the losses the claimant will suffer, and for how long, plus the cost of things such as ongoing medical care.

Various factors are taken into account, such as life expectancy, how much the victim was earning and how long they had left before retirement.

Actuarial tables (the Ogden Tables) are then used to determine the lump sum figure.

When was discount rate introduced?

Under the Damages Act 1996, the Lord Chancellor fixes the discount rate, and the system was first used in 1999.

The range of the discount rate was originally between 0% and 5%, but this was later changed to a range of between -2% and 3%.

How has the rate changed over the years?

For most of the time since the discount rate was introduced, it was set at 2.5%.

However, in July 2019, the Lord Chancellor adjusted the discount rate to -0.25%, which is an increase on the previous rate of -0.75% set in 2017.

What effect does the discount rate have on insurance premiums?

Because insurers have to account for more expensive potential payouts, a cut in the discount rate can lead to higher premiums.

The exact change will vary from insurer to insurer, but when the change to the rate was announced in 2017, Huw Evans, director-general of the Association of British Insurers, said it would be inevitable that “there will be an increase in motor and liability premiums for millions of drivers and businesses across the UK”.

It’s impossible to pin down exactly what the impact on premiums is, as there are always other factors in play (such as changes to insurance premium tax). But it was widely reported at the time of the change that it would lead to increases in average motor premiums of up to £25 a year, with younger drivers being hit by up to £75.