Analysis of the Upcoming Discount Rate changes
The below brief is an analysis of the upcoming discount rate changes in England and Wales, their potential impact on personal injury claims, and comparisons to recent changes in Scotland and Northern Ireland.
Lewis Jackson, Senior Claims Handler at Romero Insurance Brokers, gives an indepth review of the Ogden rate change and what it means for clients and claimants.
How will personal injury claims change?
“The way personal injury settlements are calculated in England and Wales is about to change, likely resulting in smaller payouts, especially for younger people with serious, long-term injuries. This is because of a change to the “discount rate,” (also known as the ‘Ogden rate’) which estimates how much invested money will grow over time.
When someone wins a personal injury case, they often receive a lump sum to cover future expenses like medical care and lost income. The “discount rate” accounts for the fact that this money can be invested and earn interest. Currently, the rate is negative (-0.25%), meaning the courts assume very little investment growth and thus award larger sums up front. However, Scotland and Northern Ireland recently increased their rates to 0.5%, and England and Wales are expected to follow suit.
A higher rate means the court assumes greater investment returns and therefore awards a smaller initial lump sum. This would disproportionately impact younger claimants, as they have more years of future expenses to cover. For example, a 10-year-old could see their payout reduced by 25% with a 0.5% rate, whereas a 50-year-old claimant would only see a reduction of 13%.
It is worth bearing in mind that the change does not affect general payouts for compensation such as pain, suffering, and loss of amenity, nor does it affect past losses.
Industry experts have applied the newly announced rate to existing claims, to give an indication as to what the true effect may be. For example, a 36 year old male with an orthopaedic injury would see future loss of earnings reduced from £200,000 to £180,000. Whereas a more serious injury where the claim value is worth £6m could see reductions of over £800,000 for future care/other losses.
It is therefore important for claims handlers to take into consideration the specific facts of the case before making assumptions on the level of reductions which may be applied.”
So, is the Discount Rate Increase a ‘Win’ for Insurers?
“Yes and no. On the face of it, it can appear that insurers are making vast savings on potential claim payouts to the detriment of claimants. However, it is important to remember that this change is being made to address the balance and ensure a fairer claims system for everybody. If no change was made, claimants could see themselves profiting from a claim based on the state of the economy, and defendants would be penalised by increases to their renewal premiums.
The change will come into effect from 11th January 2025, but we can expect to see changes take some time to filter through as claims progress.”
