Discount rate too cautious?

It is not realistic to base the personal injury discount rate (DR) on the assumption claimants are cautious investors, insurance lawyers say.

The DR is used to calculate how much compensation should be awarded for catastrophic injury claims, and is set by the Lord Chancellor. It is currently based on the assumption the claimant is a low-risk investor who invests in index-linked government stocks (ILGS).

Responding to a government consultation into how the DR should be set in future, insurance law firm Kennedys said it would be more accurate to base the DR on ‘ordinary prudent investors’ with a mixed-risk portfolio of investments.

In February Lord Chancellor Liz Truss lowered the DR from 2.5% to -0.75%, which will increase the financial burden on the NHS. Kennedys said the new rate reflects the fact that investments in ILGS currently result in a net loss relative to inflation.

Kennedys partner Mark Burton said: ‘The enormous increase in claims costs caused by the new rate risks a number of adverse outcomes. At a claims-handling level, we predict that settlements may now be delayed while awaiting the consultation outcome, and that some cases will become more entrenched as compensators are forced to argue smaller points because the financial stakes have been raised so high.’

However, Neil Sugarman, president of the Association of Personal Injury Lawyers (Apil), said: ‘Injured people have gone seriously under-compensated for far too long.

‘The formula for making the calculation does not require injured people to invest their compensation in high risk investments. This is exactly how it should be when that money is supposed to look after them for the rest of their lives.’