Mark Holt, managing director of personal injury settlement specialist Frenkel Topping and leading authority on the Ogden rate, reacts to the government’s decision to set it at -0.25%
Many claimants are going to feel short-changed by the announcement setting the discount rate at just -0.25%.
When the cuts to the discount rate were announced in March 2017—and met with disbelief across the insurance industry given the substantial impact on personal injury cost calculations and the consequent increased cost of insurance premiums—the government issued guidelines that the next new rate would be set before August 2019 and would be between 0 and 1%.
We’ve seen thousands of claims settled on the basis of these guidelines. The defendant would argue for 1%, the claimant for 0%, and the final settlement would typically be somewhere in the middle.
In these large claim cases that can amount to millions of pounds, a difference of even a quarter of a percent makes a substantial difference to the final settlement.
The new rate means that we are going to see cases go back to court. For recent large settlements, these will simply not get approved because the sum agreed will not reflect the new rate.
Clearly, the lord chancellor has sought wise counsel from the government actuary and investigated client outcomes at a range of percentage points, weighing up the risks of both under and over compensation: “I note that, on the baseline assumptions, at a rate of -0.25%, the representative claimant as modelled by the government actuary has approximately a two-thirds chance of receiving full compensation and a 78% chance of receiving at least 90% compensation. Such a claimant is approximately twice as likely to be overcompensated as under-compensated, and is approximately four times as likely to receive at least 90 percent compensation as they are to be under-compensated by more than 10 percent. I consider that this leaves a reasonable additional margin of prudence which reflects the sensitivities of the rate to the baseline assumptions.”
The insurance industry has been vocal in supporting a positive rate, and it has also been widely believed that we would follow the system implemented in Jersey where a split rate has recently been introduced. In Jersey, a 0.5% rate applies to claims up to 20 years and 1.8% for anything beyond 20 years.
This dual rate system creates conflict, however, especially in cases where life expectancy is around 20 years, and could create a situation where parties are going to court for a decision on life expectation and a further decision on the discount rate appropriate to that claim, opening up new grey areas and new litigation processes. We note that the potential to adopt a dual rate in the future remains up for discussion and we would welcome the opportunity to participate in any consultation.
The new rate brings new certainty
From now on, claimants are set to benefit, especially now all uncertainty over the rate has been removed.
At Frenkel Topping, we always keep the claimant’s best interests top of mind. The new rate brings certainty and allows fact based decisions over the investment of the settlement, based on the assumption that claimants will invest in a low risk package of products for incremental growth.
The lord chancellor has suggestion a division of 42.5% to growth assets and a 57.5% allocation to matching assets. We’re also pleased to see the inclusion of the assumption that claimants are being ‘properly advised’ as this is forms the basis for everything we do at Frenkel Topping. We remain confident that our clients receive the best possible advice for their circumstances but is the cost of this advice included in the 0.75% assumption for tax and expenses.
There can be no hard and fast rules in the world of personal injury claims, especially in the extreme injuries we work with. Every single individual—which usually extends to the whole family who are of course also greatly affected—is different and each case has its own specific set of circumstances that need careful consideration.
To me, the fairest solution will balance out the settlement over its duration. This will achieve a fair claim for the injured individual and their family, better transparency for insurers and, generally, will reduce the tendency towards increased insurance premiums across the board.