Negative discount rate set: what this means for the marine, aviation and travel industry and their insurers

Lord Chancellor Elizabeth Truss yesterday changed the personal injury discount rate from 2.5% to -0.75%. The Lord Chancellor has stated that she had calculated this new rate on the basis of a three-year average of real returns on index-linked gilts.

This is a major blow to those in the marine, aviation and travel industry and their insurers, as this will greatly increase the cost of claims for future loss of earnings and care as well as financial dependency and lost years claims. The Ogden tables which currently contain all the figures used for calculating such claims do not include a -0.75% column but instead only a -0.5% and a -1% column. However, we presume that amended tables containing a -0.75% column will be produced shortly. In the meantime, for the purposes of the example set out below, we have taken the midpoint between the -0.5% and the -1% columns.

Example 1

A 70-year-old man dies from an asbestos condition and his estate has a financial dependency claim. If we assume that this 70-year-old man had a pension income of £20,000 per annum and his wife a pension income of £5,000 per annum then this will result in a multiplicand of £11,667.

On the basis of the 2.5% discount rate previously in place, this would result in a multiplier of 13.44 and a financial dependency claim of £156,804. However, our extrapolated multiplier for the -0.75% discount rate is 18.86, resulting in a financial dependency claim of £220,040. This results in an additional payment by insurers of £62,236.

Example 2

A 30-year-old man is seriously injured at work and it is found that he has a continuing loss of earnings claim of £30,000 per annum until he would have retired aged 65.

On the basis of the 2.5% discount rate, this would result in a multiplier of 22.84 which would result in a loss of earnings claim of £685,200.

However, our extrapolated multiplier for the -0.75% discount rate is 38.76, resulting in a loss of earnings claim of £1,162,800. Therefore, insurers would have to pay an additional £477,600.

This new discount rate will become effective on 20 March 2017 but it is very unlikely that any claimant will be prepared to settle such a claim before 20 March 2017 unless the defendant agrees to use the new discount rate. The Government proposes to review how the discount rate is set to make sure it remains fit for purpose including if in future it should be set by an independent body and whether there is a better or fairer framework for claimants and defendants.