Reforms to discount rate will have impact on injury claims

Andrew Constable is a Partner in Clyde & Co's Edinburgh office.
Andrew Constable is a Partner in Clyde & Co's Edinburgh office.
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An award of damages is designed to compensate a wrongly injured person for the loss and harm caused by the injury – no more and no less. In Scotland, with few exceptions, compensation relating to future losses is paid in a lump sum at the point of settlement. However, how best can we ensure the sum paid does not overcompensate or undercompensate? The uncertainties inherent in life mean that the figure awarded will almost certainly be wrong. The law should, nonetheless, do its very best to ensure that as close to 100 per cent compensation is achieved as is possible. To do this, they factor in a discount rate.

Claimants receive their compensation upfront and are expected to invest this money and receive a return. This discount rate reflects the likely rate of return on the investment and aims to ensure compensation remains as accurate as possible.

A recent Bill introduced in Scotland proposes reforms to the discount rate which could have significant implications for anyone dealing with serious injury claims. The Damages (Investment Returns & Periodical Payments) (Scotland) Bill was placed before Parliament on 14 June. One policy objective of the Bill is to put a new statutory regime in place for calculating the discount rate which would be applied to future financial losses for personal injury cases. The level of the discount rate is of fundamental importance and the impacts can be significant. For example, fluctuations in it have caused profitable insurance companies to go into the red and can affect compensation for catastrophically injured claimants by six figure sums.

Under the Bill, responsibility for fixing the rate moves from the Scottish Ministers to the Government Actuary, based in London. For the first time, the Actuary will need to consider the rate against the background of a notional investment portfolio containing a mix of assets and reflecting a hypothetical investor who:

has received damages; has no financial resources other than those damages; and whose objectives are to ensure the damages will meet the losses and expenses for which they were awarded and will be exhausted at the end of the period for which they were awarded.

Whereas previously such investors were properly thought to be “no risk” and invest only in the safest bonds, it is now considered reasonable for them to speculate at least to an extent. Therefore, the portfolio includes national and overseas equities as well as index-linked gilts. This differs to England and Wales where the Lord Chancellor is responsible for setting the rate following consultation with an expert panel consisting of the Government Actuary and an expert panel with appropriate experience. It is possible, even likely, that the Government Actuary, given his dual role, will take into account the views of the panel in setting the Scottish rate. If so, it would be reasonable to infer that the rate will be similar, if not the same both north and south of the Border. If there is an increase from the current rate of -0.75 per cent, any savings made by insurers should contribute to reduced premiums as has been undertaken by insurers in light of the whiplash reforms proposed in England and Wales.

The current understanding is that the Scottish Parliament’s Economy, Jobs and Fair Work Committee will be responsible for moving the Bill through its legislative stages. The first stage will be a call for evidence on the Bill before the end of June and oral evidence in September. It is thought likely that the Bill will become law sometime in 2019 and the initial review of the rate requires to be started within the 90-day period following commencement. Thereafter, there will be regular reviews within three-year periods.

Changes suggest that technical analysis will replace political involvement and more regular review should lead to a consistent use of the applied rate.

Andrew Constable is a partner in Clyde & Co’s Edinburgh office