As has been reported widely, on 27 February 2017, the Lord Chancellor formally announced a change in the discount rate applicable in relation to the calculation of future losses in claims from 2.5% to minus 0.75%. The change will take effect on 20 March 2017. The implications of this change for insurers are potentially huge, vastly increasing the potential payouts to claimants.
However, at least for the time being, it is important to note that the changes do not apply in Scotland. Section 1(5) of the Damages 1996 Act states that, in Scotland, the discount rate is to be set by the Scottish Ministers following mandatory consultation with the Government Actuary. The last change for England was in 2001. It took Scotland until 2002 to make the change to the same level, so it can perhaps be expected that it will be at least several months before a similar change is announced in Scotland.
However, the fact that the change is not yet formally announced in Scotland does not mean that claims in Scotland will be unaffected. In reality, what will happen with immediate effect is that pursuers’ firms will begin arguing that the new lower discount rate ought to apply. The question for insurers is how they deal with this new approach.
It is possible that pursuers will seek to make reference to section 1(2) of the 1996 Act which states:
Subsection (1) above shall not however prevent the court taking a different rate of return into account if any party to the proceedings shows that it is more appropriate in the case in question.
However, the key words here are “the case in question.” This was an issue considered by the Inner House in Tortolano v Ogilvie Construction 2013 SC 313. In that case, it was argued that the discount rate of 2.5% ought to be reduced as it was not realistic that a pursuer could achieve an investment rate such that the 2.5% rate reflected a fair discount.
However, the Inner House unanimously rejected that approach. While it was accepted that section 1(2) gave the court a discretion, that discretion was to be case specific. As Lord Carloway said:
“The Lord Ordinary is thus correct in his analysis that section 1(2) cannot apply where the reasons for a "more appropriate" rate might arise "in every conceivable case". If the pursuer wishes to have the rate changed, he should do so through the political process or by way of judicial review.”
Lady Smith agreed: “The fact that market forces have altered the economic landscape in a manner which affects all investors is about as far removed from a case specific feature as one could get.”
So the fact that the rate has changed in England and Wales is not case specific, and any attempt to argue that it is should be rejected.
However, while that is a clear position to take, some practicalities fall to be considered, not least that it is likely that a similar change will be coming in Scotland – probably at the latest by 2018. That being the case, those representing pursuers could simply hold off settling claims unless a lower discount rate is applied.
Further, there are likely to be motions to sist or discharge proofs pending the likely change, and it is likely the courts would be sympathetic to that approach. Finally, even if a case is now heard and goes to avizandum, if the discount rate change then comes in, the court is likely to put the matter out By Order to be addressed on the change.
In short, therefore, while it can be validly argued that the change does not yet apply in Scotland, in reality all claims will have to be approached on the basis that for all intents and purposes, the change does apply – and that will have to be borne in mind when considering reserves.