Personal Injury Compensation Insurance Claims – Discount Rate Changes
The UK Government recently announced a change in the Discount Rate (commonly referred to
as the Ogden Rate) used in the calculation of compensation awards to those who have suffered
serious personal injury where a party is considered liable for causing the injury. The decision
affects cases under the jurisdiction of courts in England and Wales although a similar change
is anticipated from the devolved governments of Scotland and Northern Ireland.
What is the Discount Rate and how does this work in practice?
Insurance claim settlements for personal injury are made up of pain and suffering
compensation, future loss of earnings, future cost of care, other ongoing financial support
required and legal and professional costs.
The Discount Rate is applied to the compensation for future loss of earnings, future cost of
care and other ongoing financial support required. This is based on a claimant having the
ability to invest a lump sum financial compensation amount over a number of years. The
Discount Rate is pre-set and linked to returns on low risk investments, typically Index-Linked
Gilts.
Since 2001 the Discount Rate has been set at +2.5%. In the current financial climate with low
returns on low risk investments the Lord Chancellor has decided such investments are likely
to produce a negative return and therefore the Discount Rate has been amended to -0.75%.
The consequence of this is, instead of compensation awards being reduced to take account
of a +2.5% year on year investment return, they will be increased to take account of a -0.75%
loss on investment value.
There are standard Ogden Table calculations used by the courts (and hence insurance
companies) to determine the amount of compensation payable. Certain ‘multipliers’ are
applied to the calculation dependent on factors such as the gender, age and projected
mortality rate. The amount of the ‘multiplier’ is affected by the Discount Rate.
As an example, the ‘multipliers’ applicable to a claim being made by a 30 year old male under
the previous +2.5% Discount Rate and new -07.5% Discount Rate are as follows:
Multipliers for pecuniary loss of life (males)
Age
-2%
-1.50%
-1%
-0.75%
-0.50%
0%
0.50%
1%
1.50%
2%
2.50%
3%
30
111.59
92.63
77.69
71.43
65.83
56.34
48.68
42.45
37.34
33.12
29.60
26.65
Multipliers for loss of earnings to pension age 65 (males)
Age
-2%
-1.50%
-1%
-0.75%
-0.50%
0%
0.50%
1%
1.50%
2%
2.50%
3%
30
49.03
44.50
40.52
38.71
37.01
33.90
31.15
28.70
26.52
24.58
22.84
21.28
If the 30 year old male claimant’s future nursing care costs are calculated at £75,000 per year
this element of the claim amount would previously have been £75,000 x 29.60 = £2,220,000
but would now be £75,000 x 71.43 = £5,357,250.
If the 30 year old male claimant’s future loss of earnings are calculated as £25,000 per year
this element of the claim amount would previously have been £25,000 x 22.84 = £571,000
but would now be £25,000 x 38.71 = £967,750.
There is therefore a total difference of £3.534M (+127%) in this (simplified) example. The
initial pain and suffering costs as well as the subsequent legal and professional costs also
have to be factored in to a claim amount in addition to the above figures.
Other examples are as follows:
@ +2.5% Discount Rate
@ -0.75% Discount Rate
Claim Size
Claim Size
Claimant
Claimant
Claim
Age
Gender
70
Male
£1,100,000
£1,388,607
+26%
55
Male
£1,400,000
£2,050,000
+46%
47
Male
£8,500,000
£14,999,454
+76%
30
Female
£12,000,000
£22,997,255
+92%
30
Male
£2,240,000
£6,140,000
+174%
27
Female
£6,500,000
£13,949,421
+115%
20
Male
£5,000,000
£9,904,348
+98%
18
Male
£7,600,000
£19,300,000
+153%
10
Male
£10,000,000
£26,512,997
+165%
Increase
While the insurance industry is lobbying the UK Government to review this decision there has
been no movement from the Lord Chancellor at the time of writing and, as things stand just
now, we have to assume this will continue to be the basis of calculating compensation awards.
Which insurances does this affect?
The classes of insurance cover which could result in personal injury compensation claims
being made against you include Employers’ Liability, Public Liability, Products Liability,
Property Owners’ Liability, Professional Indemnity and Motor.
Motor insurance is subject to an unlimited amount of cover for third party personal injury in
the UK due to the requirements of the Road Traffic Acts. Other relevant classes of insurance
cover are subject to a maximum Limit of Indemnity chosen by you. Up to now, our
recommendations for the Limit of Indemnity you have in place were based on the previous
+2.5% Discount Rate for personal injury compensation claims.
How does this affect me?
With the potentially substantial increase in compensation awards illustrated above it is
prudent that the current Limits of Indemnity applicable to your insurance covers are reviewed
for suitability. There is also a knock-on effect to the insurances of sub-contractors or subconsultants you may utilise, the minimum insurance requirement amounts for your suppliers
and the insurances of any contractors who may be present at your locations.
The above example figures are specific to a single claimant making an injury only claim. It is
possible there could be multiple claimants arising from the same incident as well as property
damage and consequential financial loss costs as well as injury. You will therefore appreciate
that, in the event of a serious incident, there is potential for claim costs to be substantial.
What do I do next?
There are various factors to consider when setting your Limit of Indemnity, including the
nature of the activities, the type and accumulation of people who could be affected,
contractual requirements (including exchange rate fluctuations where requirements are linked
to a foreign currency), values of property at risk, where products are utilised, who uses
products or services, which sectors are worked for or supplied to and the potential
consequential financial loss costs of an incident. Your attitude to risk is also an important
consideration when considering the extent of ‘catastrophe’ protection you feel is suitable for
your requirements.
Please contact your CCRS Account Director to discuss your current cover basis or if you have
any questions regarding this communication.