Julian Chamberlayne writes for New Law Journal giving his view on the new discount rate announced by the Lord Chancellor in July. In this article ‘Time to stop the negativity about the discount rate’, Julian says that finally, after three Lord Chancellors and a wait of more than two years, we have a new (and fairer) discount rate.
On 15 July 2019, David Gauke, the latest in a lengthening list of former Lord Chancellors, set a new discount rate of -0.25%, coming into force on 5 August 2019. This should end more than two years of uncertainty that has stalled the resolution of many serious injury claims. However, in doing so, he has left many in the insurance industry acting like they did not get the birthday present they had been promised.
Huw Evans of the Association of British Insurers was so outraged last week he wrote to the Lord Chancellor to complain that the government’s impact assessment failed to reflect that the -0.75% rate was ‘not widely adopted’. He ignored the fact that since the -0.75% rate came into force it has been the only rate used by courts. In that respect, it has been wholly adopted. No doubt, countless ‘door of the court’ settlements also took place at this rate.
Insurers seem to have assumed there was some implied promise from the government that they would get their present of a 0%–1% rate. But they should have lowered their expectations when Lord Keen, Ministry of Justice (MoJ) spokesperson for the Lords, appeared before the Justice Select Committee on 1 November 2017 and said: ‘With the benefit of hindsight, it is perhaps unfortunate that the figure was there, but it was just to indicate the direction of travel when you moved the risk element of the portfolio.’
Notwithstanding that note of caution, the industry-wide assumption still appeared to be that the discount rate under the new regime would be a positive number. I seemed to be on my own when I suggested negative discount rates may not be going away anytime soon in my articles for NLJ, of 13 April 2018, ‘Time to settle?’ 168 NLJ 7788, p8, and ‘Will the new discount rate remain negative?’ NLJ, 22 March 2019, p9.
My optimism that a positive discount rate was not inevitable was largely based on the government’s repeated commitment to the full compensation principle at each stage of this process. In David Gauke’s statement explaining the new discount rate, he refers back to that principle, quoting from Lord Hope in the House of Lords’ decision in Wells v Wells  AC 345,  All ER (D) 352: ‘The object of the award of damages for future expenditure is to place the injured party as nearly as possible in the same financial position he or she would have been in but for the accident. The aim is to award such a sum of money as will amount to no more and at the same time no less, than the net loss.’
It is notable that Lord Hope was talking about ‘the injured party’, because each claimant is only involved in their own claim and their award of damages is to meet their future injury related needs. Unlike insurers, each injured claimant is in no position to spread the cost and risk over multiple claims. ‘In the first of my six articles concerning the discount rate in NLJ, on 29 September 2017 (‘Full compensation & the discount rate (Pt 1)’, 167 NLJ 7763, p8), I posed what I saw as the fundamental question: ‘If the law is to change to force seriously injured claimants to take investment risk, the debate needs to look at the flip side of alleged over compensation: what proportion of claimants do we consider it fair to potentially go under-compensated?
This fundamental question does not get a mention in the MoJ’s paper. It is a relief to see that Mr Gauke, prompted by the Government Actuary’s Department (GAD), addressed this important question. His answer was one third. He acknowledges that to set a discount rate of +0.25%, at which only half of the claimants saw their damages awards last to meet their assessed needs over their lifetime, would not be full compensation. I agree.
However, he thought the lower figure of -0.5% suggested by the GAD would be a step too far, even though that would still leave about 30% of claimants running out of money before the end of their lifetime. So, he settled on the rate of -0.25%, which will mean that about one third of claimants will run out of compensation and a worrying 22% would suffer a shortfall of 10% or more. In serious injury claims, this could leave them unable to fund their care and equipment needs for four years or more. Does that sound like full compensation for each of those claimants?
Troublingly, the impact assessment also makes a couple of references to what I would view as a significant dilution of the full compensation principle to one that “amounts to a reasonable prospect of a claimant receiving full compensation”.
After three Lord Chancellors and a wait of more than two years, we have a new discount rate of -0.25%, which is far fairer for claimants than most industry commentators expected. It also has the advantage of providing a period of certainty, although we can anticipate some further turmoil around the time of the next review in five years.
However, it would be wrong to categorise this rate as a form of windfall for claimants. Under the new methodology, they now have to gamble their compensation, with minimal allowance made for investment advice, but one third of them will still run out of funds. Close scrutiny of the assumptions made by the GAD reveals the cruel irony that the new rate will fail an even greater proportion of the most seriously injured claimants. These are claimants with expected lifetimes of less than the assumed 43 years, whose future losses are mainly for care and other earnings-related losses and whose necessarily larger award are likely to suffer higher taxation.
For this important category of claimant, who is wholly reliant on their compensation to meet their future needs, a fair rate would have been well under -1%. Even my optimism never extended that far, so perhaps the focus now needs to shift to compelling insurers to make offers on periodical payment options terms alongside any lump sum offers, or at least offer cogent reasons why they cannot or will not.