In the United Kingdom, when victims of life-changing personal
injuries accept lump sum compensation payments, the actual amount
they are awarded by English Courts is adjusted according to the
interest that they can expect to earn by investing the award. In
finalising the compensation amount, English Courts apply a
calculation called the Discount Rate – with the rate
percentage linked legally to returns on the lowest risk
investments, typically Index Linked Gilts.
On 27 February 2017, the Lord Chancellor and Minister of Justice
announced significant changes to the Discount Rate applicable under
the "Ogden Tables" to the calculation of the compensation
payments and lump sum damages awards in England and Wales. The
announcement was not welcomed by the UK insurance industry, as many
UK insurers will face the prospect of significantly increased
personal injury damages liabilities. However, legal
representatives for injured claimants have long been advocating for
Discount Rate reform in England and Wales, against the background
of a number of consultation exercises.
The decision by the Lord Chancellor to lower the Discount Rate
from 2.5% to minus 0.75% was made in accordance with the
UK's Damages Act 1996, which makes clear that claimants must be
treated as risk averse investors, reflecting the fact that they are
financially dependent on this lump sum, often for long periods or
for the duration of their life. Compensation awards using the
discount rate should, so far as possible, put the claimant in the
same financial position that they would have been in had they not
been injured, including loss of future earnings and future care
costs. The new Discount Rate of minus 0.75% comes into effect
in England and Wales on 20 March 2017, following amendments to the
The Discount Rate previously had been set in 2001, and remained
unchanged for 16 years. The Lord Chancellor's recent
change to the Discount Rate will see compensation payments rise in
England and Wales, and, as such, it is likely to have a significant
impact on the insurance industry, and a knock-on effect on public
services with large personal injury liabilities (particularly the
National Health Service).
In the Lord Chancellor's announcement to the London Stock Exchange on
27 February 2017, the UK Government made four key pledges:
the UK Government has committed to ensuring that the NHS
Litigation Authority has appropriate funding to cover changes to
hospitals' clinical negligence costs;
the Department of Health will work closely with general
practitioners (GPs) and Medical Defence Organisations to ensure
that appropriate funding is available to meet additional costs to
GPs, recognising the crucial role they play in the delivery of
the UK Government will launch a consultation in the coming
weeks to consider whether there is a better or fairer framework for
claimants and defendants, with the government bringing forward any
necessary legislation at an early stage. The consultation will
consider options for reform – including whether the rate
should in future be set by an independent body; whether more
frequent reviews would improve predictability and certainty for all
parties; and whether the methodology is appropriate for the
the UK Government's Chancellor of the Exchequer, Philip
Hammond, will meet representatives of the insurance industry to
assess the impact of the rate adjustment.
It should be noted that in certain other common law
jurisdictions such as Bermuda, the Courts already had moved in
recent years towards a Discount Rate consistent with the minus
0.75% now applicable in England and Wales, on a case by case basis
(see, e.g.,Simon v Helmot  UKPC 5;
Argus Insurance v Talbot  Bda LR 114; Warren v
Harvey  Bda LR 59; and Colonial Insurance v
Thomson  Bda LR 41).
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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