27 February 2017

The Ministry of Justice has today (27 February 2017) announced its decision to cut the discount rate which is currently set at 2.5% to - 0.75%.

The intention of the discount rate is to ensure that pursuers are neither over, nor undercompensated when they receive a lump sum award of damages. The rate is based on the presumption that all pursuers are risk averse and may be financially dependent on an award of damages for long periods and often the duration of their life.

The current rate of 2.5% was set in 2001 based upon a three year average of real yields on the Index Linked Gilts, however on account of a fall in the real yields since 2001, the rate has been reduced. The new rate of -0.75% has been based on a three year average of real returns on Index Linked Gilts.

The amended rate, which is to become effective on 20 March 2017, will have far reaching consequences for the insurance industry as a whole, the NHS and beyond, with warnings of an inevitable increase in insurance premiums for millions of individuals.

There has been uproar to the decision with the Association of British Insurers (ABI) branding the decision as “crazy” and shares in major British insurance companies falling on the stock exchange. The decision comes as a shock to many insurers who had made contingency plans on the presumption that the rate would be altered to 0%. As a result, many large insurers have taken the decision to delay reporting their yearend profits to allow them to assess the impact that the decision will have on their yearend figures.

There is no question that the new discount rate will have a significant impact on damages awards going forward. If we take, for example, a 40 year old male, using a differential of £20,000 per annum to a pension age of 65, the difference is almost £170,000. This increases to almost £320,000 for a 30 year old male. Clearly the sums are significant.

The Government has stated that it acknowledges the impact that the decision will have on the insurance industry, inviting representatives of the insurance industry to meet with the Chancellor to discuss the situation, with the consultation on the discount rate being brought forward to Easter 2017. In response, the ABI has scorned the decision to change the discount rate using a “broken formula” as “reckless in the extreme” and has called for immediate action to be taken by the Ministry of Justice to create a fairer deal for everyone.

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