A big small change

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Paul Wershof of local solicitors Wiseman Lee explains the recent changes to the amount of compensation insurance companies must pay to those who have suffered life-changing injuries.

The government's announcement on 27 February that it will cut the Discount Rate – a calculation used to determine lump sum compensation to claimants who have suffered life-changing injuries – from 2.5% to minus 0.75% was met with predictable outrage by insurance companies. The Director General of the Association of British Insurers called it a "crazy decision" by Liz Truss, the Lord Chancellor, and significant sums were wiped off the value of major insurers who predict a fall in profits as a result.

But before readers start to weep into their cornflakes at the fate of our insurance industry, rest assured that the cost will be passed to consumers in the form of increased premiums over the next few years.

So, why has the government done this? The Discount Rate, also known as the Ogden Rate, is a calculation used by the courts to determine how much insurance companies should pay out to customers in cases of life-changing injury and any case where future losses, such as care costs or loss of earnings, are claimed.

The rate had not changed since 2001 and is roughly calculated as follows: prior to the rate change, if you received an award for future losses of £1,000 as the result of a claim, the insurance company would pay you £975. This was because it was assumed you would invest the £975 and receive interest of around 2.5%. The Discount Rate is linked by law to returns on the lowest risk investments, typically Index-Linked Government bonds, the yield on which has fallen dramatically since 2001. Under the new rate (effective from 20 March 2017), the insurance company must pay £1,007.50 in compensation.

The difference between £975 and £1,007.50 is insubstantial, but when applied to cases of catastrophic injury or birth defects as a result of negligence, where future losses may amount to millions of pounds, the change in the Discount Rate becomes highly significant and will help to ensure that clients who have suffered life-changing injuries will be properly compensated as a result.

A statement from the Ministry of Justice said: "The law 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 the duration of their life. Compensation awards using the rate should put the claimant in the same financial position had they not been injured, including loss of future earnings and care costs."

The reality is that the vast majority of claims will not be affected by this rate change. The outrage of the insurance industry is misplaced and the change in the rate, although long overdue, will be welcomed by those that seek justice for the severely injured.

Wiseman Lee is located at 9–13 Cambridge Park, Wanstead – call 020 8215 1000

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