Personal injury discount rate in England and Wales: exploring the options

In advance of the next formal review of the personal injury discount rate (PIDR) in England and Wales - which must begin by 15 July 2024 - the Ministry of Justice (MoJ) issued a call for evidence on 17 January 2023, seeking additional evidence and views on the introduction of dual or multiple rates.

The consultation closes on 11 April 2023 after which the Ministry of Justice will prepare and publish its response by July 2023.

What is the personal injury discount rate?

Future costs, including care costs within a personal injury or clinical negligence settlement are calculated using the PIDR. In practical terms, the lower the PIDR, the higher the lump sum payable to the claimant.

In 2001, Lord Irvine of Lairg set the rate at 2.5% under the Damages Act 1996. At that time, Lord Irvine justified a reduction in the rate from 3% to 2.5% based on the three-year rate of return of low risk investments, index linked government stocks (ILGS). He also took into account additional factors, such as the Court of Protection continuing to invest in multi-asset portfolios and the likelihood of claimants investigating in a mixed portfolio.

However, in 2017 the Lord Chancellor adjusted the discount rate to -0.75%, which was subsequently amended to -0.25% on 15 July 2019, following a consultation process and as set out within the Civil Liability Act 2018.

Context to the call for evidence

Before the current discount rate of -0.25% was set by the then Lord Chancellor in July 2019, the UK Government Actuary had explored the possibility of dual rates. However, the government decided that there “was a lack in the quantity and depth of evidence available at that time to conclude that a dual rate was more appropriate than a single rate.” As such, the government committed to seeking additional evidence on this issue to inform future PIDR reviews.

Leading up to the launch of the 2023 call for evidence, the MoJ hosted a number of industry roundtables, in addition to launching the recruitment process for the expert panel that will advise the Lord Chancellor.

Separately, the government expects that a public consultation similar to the one undertaken ahead of the last rate review will form part of the evidence gathering exercise, but that will be a decision for the expert panel to take once they have been constituted.

Call for evidence

The call for evidence considers different models for setting the PIDR in other jurisdictions including Hong Kong, the Canadian province of Ontario and Jersey which set different rates based on the duration of the award, in addition to the heads of loss approach adopted in the Republic of Ireland.

Comment

It is important for insurers and compensators to consider what impact different rates and approaches to setting the rate may have on current and future claims reserves.

A dual rate may be favourable to those indemnifiers who have a significant number of long life expectancy claims (for example those involving children) and who would benefit from the higher long term discount rate. However, indemnifiers with claims where the life expectancy is for example, less than 15 years, may see an increase in damages with the lower short-term discount rate.

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