The Ministry of Justice and the Scottish Government have launched a six week consultation into how the personal injury discount rate should be set in the future.

The announcement comes only ten days after the discount rate was reduced by Secretary of State for Justice from 2.5% to minus 0.75%, much to the surprise of the insurance industry. Indeed, the UK is now the only major economy in the world with a negative rate, resulting in significantly increased claims costs to insurers and taxpayers, estimated to be in the region of £3.5bn for outstanding claims.

The consultation paper, "The Personal Injury Discount Rate: How it should be set in future", considers the methodology of how the rate will be set, but does not make any specific proposals. In particular the following core issues are being considered:

  • What principles should guide how the rate is set?
  • What investment returns should be taken into account?
  • How often should the rate be set?
  • Should it be left open or would an annual, three year or five year system be preferable?
  • Who should set the rate? Should it remain with the Government or should an expert panel be used for example?
  • How periodic payment orders are used and whether their use should be encouraged?

Evidence will be obtained on how damages awards are actually invested and this is to be applauded. It is to be hoped the consultation considers the reality of claimants' investment behaviour and results in meaningful change.

It is important to note that there is no mandatory requirement for an injured party to behave in a 'risk averse' manner and therefore the current legal framework is both unrealistic and outdated. Under the new rate, claimants will be compensated on that basis, but could make their investment decisions on an entirely different basis, leading to overcompensation.

The new framework must ensure it remains fair to victims, whilst accurately reflecting claimants' investment behaviour, so the system is both viable in the long term and not unreasonably onerous to either party.

The consultation opens on 30 March 2017 and will close on 11 May 2017. The Ministry of Justice and Scottish Government will publish their response to the consultation by 11 August 2017.