The personal injury discount rate can be conroversial. Here's why - Steven Smart

Readers with an eidetic memory will recall an article in July regarding legislation which made changes to the method used to calculate the Personal Injury Discount Rate in Scotland. This figure is crucial when valuing damages in more serious claims. It is used to adjust sums paid for future losses to try to avoid excessive or insufficient compensation, taking into account actuarial data on life expectancy and likely levels of return if damages are invested cautiously.

A mandatory review was carried out by the Government Actuary’s Department and it was announced on 26 September that rates would be changed from -0.5 per cent in Scotland and -1.25 per cent in Northern Ireland, to +0.5 per cent in both jurisdictions. The new rates came into effect the next day.

This reverses the situation over the last five years whereby damages for identical losses sustained in Scotland and Northern Ireland would be substantially higher than sums paid to claimants in England and Wales. The new rates mean that on paper, damages for such identical losses are now worth more south of the border, at least for the time being. The Lord Chancellor is carrying out a review of the applicable rate in England and Wales, which must be concluded by 11 January 2025.

​Steven Smart is a Partner, Horwich Farrelly

Natalie Gibb set out a helpful example in her article of the different sums throughout the UK which may be due to a 17-year-old claimant requiring ongoing care at a cost of £150,000 per annum. Applying the new rates to that scenario, the damages would now be valued at £8.7 million. That is some £5.2m less in Scotland and £11.4m less in Northern Ireland than damages under the previous rates and £2.8m less than would currently be paid in England and Wales.

It is predicted this could reduce motor premiums for drivers in Scotland. During an informative session at our recent Complex and Catastrophic Injury conference, PwC UK’s Head of General Insurance, explained the import of high-value injury claims on prices paid by consumers. He thought the average premium in Scotland might fall by £60 per annum, (approximately 10 per cent) and younger drivers in particular might benefit. Prices in Northern Ireland might be reduced further still, by some 15 per cent. There should also be substantial savings for public bodies like local authorities and the NHS.

If the new rate set in England and Wales is different once again, it will be of interest whether there are further developments to the approach taken when the Scottish rate is next reviewed in July 2029. Many practitioners in this field struggle with the logic behind different levels of damages being paid depending upon whether an accident occurred in Berwick-upon-Tweed or North Berwick.

Recent changes have brought the methodology applied in Scotland closer to other jurisdictions, which is fundamentally the best attempt at applying reasonable assumptions to ensure fair compensation in the most serious cases. However, setting the discount rate can be controversial.

​Steven Smart is a Partner, Horwich Farrelly

The expedient investment and use of damages is vital for claimants who often understandably fear funds running out prematurely. On the other hand, the public must meet these costs, impacting individuals and public services alike. What on the face of it can appear to be modest adjustments to the methodology can have a massive impact on the value of damages. Perhaps the time has arrived for a detailed study into how damages are actually deployed to ensure these assumptions are providing fair and adequate compensation for all.

Steven Smart is a Partner, Horwich Farrelly.