Changes to personal injury claims settlement calculations
On Monday 27 February 2017 the Lord Chancellor, Liz Truss, made an important announcement in respect of the Discount Rate, which is used as part of the calculation to determine the amount of compensation to be paid to seriously injured individuals.
The significant change to the Discount Rate is one which affects the insurance industry as a whole, as well as you, the customer, and claimants.
What is the Discount Rate?
The Discount Rate, also known as the Ogden Rate, forms part of the calculation to determine the level of award in respect of cases involving serious injury. Claim settlements for injury are made up of a number of key components:
• compensation for pain and suffering
• future loss of earnings
• future cost of care
• ‘other’ financial support, either towards activities that cannot be performed as a result of the injury (i.e. driving, caring for dependents etc.) or the provision of additional support, such as prosthetics.
• legal and professional fees.
When assessing future loss of earnings, the courts multiply the amount they consider the claimant will lose each year by factors such as their age and their projected mortality rate. Similar factors are applied to the amount required for future cost of care.
In the case of serious injury, the amount allocated towards loss of earnings and future cost of care can be high, as the settlement is designed to provide financial indemnity over a number of years.
When such an award is made in a lump sum, it can be therefore equate to a considerable amount of money. As a result, an allowance is made by the courts in respect of future losses to reflect the fact that the claimant will be able to invest the lump sum awarded and earn interest on that investment over a period of time. The settlement is therefore ‘discounted’ by the amount of interest the claimant can expect to earn over that period. It is this adjustment which is known as the Discount Rate and that is subject to the recently announced changes.
The Discount Rate is linked to returns on low risk investments, typically Index-Linked Gilts.
What has changed?
The Government has changed the Discount Rate from 2.5% to -0.75%. This means that, rather than any lump sum award being discounted to allow for a 2.5% investment return, the indemnity settlement will be increased, reflecting a decision that over the long term there is predicted to be a negative return on investment. The effect of this change will be to increase the value of claims for future financial loss. The change is most significant for younger claimants, for whom the settlement needs to cover the greatest length of time.Claims settlement examples
Insurance Act 2015 – Important For You
The Insurance Act 2015 provides a more up to date legal framework affecting every business policy proposed, placed, renewed or amended after 12th August 2016.
It modernises insurance law and aims to make recovery from insurers simpler and fairer in the event of claim, however, these benefits are dependent on the customer making a ‘fair presentation of risk’.
To provide you with further information and what this means for you please watch the video (to right of this) and find below the link to a Customer Factsheet which outlines this new legislation and important changes to your responsibilities. Not only that, but click on the supporting documentation link below to find helpful documents providing further detail and information.
Remember, there is always someone on hand at your local Clark Thomson office to support you so please get in touch with any queries you may have.