Kennedys urges Northern Ireland Executive to change approach to personal injury discount rate
Kennedys has urged the Northern Ireland Executive to change the way the personal injury discount rate is calculated to reflect what injured people do with their compensation in real life. This is in response to a consultation issued by Stormont, which our Belfast office has responded to drawing upon the experiences of the firm’s national offices.
A failure to act could lead to higher insurance premiums and even more financial pressure on the health service, as well as a restriction of the insurance marketplace with less choice for consumers
At the conclusion of most successful personal injury compensation claims, damages are typically paid by way of a single lump sum of sometimes many millions of pounds in order to support the injured person over potentially decades. That payment may come from the government in cases of medical negligence or insurance companies for other types of accident. This money is then invested. The discount rate is a mechanism that adjusts the lump sum to factor in the income such investments are likely to generate and so avoid over-compensation.
The rate in Northern Ireland is currently 2.5%, although earlier this year the Department of Justice mooted a radical change to -1.75%, which Kennedys believes will lead to significant over-compensation.
This is because of the way the rate is currently calculated and the Department of Justice subsequently issued a consultation on its approach to the rate, which closes today.
Kennedys believes the current assumption – that claimants invest in very low-risk government bonds – does not reflect reality.
The consultation response says: “Investment advice to an ordinary prudent investor will be to invest in a diverse portfolio of investments. This will avoid or protect against the situation a current investor in government bonds faces i.e. that their investments are not producing any return but are creating a loss. That is not the outcome expected by a very risk averse investor.”
Kennedys favours the approach recently adopted in England and Wales of determining the rate by reference to expected rates of return on a low-risk diversified portfolio of investments.
Kennedys warns that continuing to use the current approach will have several negative consequences, including higher insurance premiums for consumers and commercial businesses in Northern Ireland compared with the rest of the UK and the Republic of Ireland.
It could also cause “added financial pressure for the health service, which is already under significant strain”. Further it would encourage ‘forum shopping’, where plaintiffs may seek to issue proceedings in Northern Ireland rather than the rest of the UK or the Republic of Ireland because they can recover higher damages.
Kennedys called on the Department of Justice to set up an independent expert panel which would advise on the appropriate rate every five years, with a potential mechanism for earlier review if there is a unique material change in socio-economic circumstances warranting it.
The response said the justice minister should consider the experience of England and Wales. The discount rate was revised downwards from 2.5% to -0.75% in 2017 without the government adopting a balanced and reasoned approach to the assessment.
This led to over-compensation in many cases and required legislation containing new principles for setting the rate on the mixed portfolio basis. As a result, it was adjusted upwards to -0.25% last year to deliver fairer compensation levels.
Amanda Wylie, managing partner of Kennedys Belfast LLP says: “The overriding principle is that injured people should receive 100% of the compensation they are awarded – no more and no less. We in Northern Ireland can benefit from the lessons learned from the experience of England and Wales to create a fair and balanced outcome given that the compensation system is funded largely by taxpayers and consumers, and their interests must be part of the equation.”