What is the personal injury discount rate?
21st November 2017
Earlier in 2017, the Personal Injury Discount Rate (Ogden) attracted headlines and controversy when the Government revised it from 2.5 per cent to -0.75 per cent (that’s minus 0.75).
So what is the personal injury discount rate, and how does it affect claimants in personal injury cases?
First, it’s important to understand how personal injury claims are calculated. They work on the basis that the injured party will not lose out because of the injury they have suffered. So, they will be awarded money to cover lost earnings and medical care, for example.
The principle particularly applies to cases involving serious injury cases when the injured person is left with long-term care needs, such as with acquired brain injuries or medical negligence cases. People need to be provided with the funds that will cover the cost of that long-term care.
For years, when an award for damages was made, it was done so on the basis that the injured party would put that money in a savings account, and it would accrue interest over the years. Therefore, the amount given was reduced by 2.5 per cent on the assumption that people would put their compensation into a savings account and recoup the total value of the award.
Ie, if you were awarded £100,000, then you would actually receive £97,500, and be expected to invest some of that money in order to make up the shortfall.
Most people are risk-averse
However, as anybody who has tried to open a savings account will know, it’s very difficult to get 2.5 per cent interest on most normal accounts and in the current climate it would take a very long time to recoup the ‘missing’ money.
While it is possible to achieve better interest in ‘riskier’ accounts – such as stocks and shares ISAs – the Government has recognised that most people are risk-averse, and will not be prepared to put their compensation award in an account that is not guaranteed.
So, in 2017, the personal injury discount rate was changed to -0.75 per cent – this means injured parties who make a successful personal injury claim will be awarded the total value of their claim, plus an additional 0.75 per cent.
This means nobody is expected to invest in savings accounts that are classified as being of higher risk, and nobody misses out.
So it’s good news?
It’s good news for claimants, but the insurance industry wasn’t happy. The vast majority of personal injury claims are paid for by insurance, so it’s insurance companies that are footing the bill.
The government has also proposed reforms to adjust the rate to between 0-1% in 2018 – we will keep you updated if any changes occur within the industry.
Premier Medical provides medico legal reporting services for personal injury claims, medical negligence and soft tissue injuries. Learn more about our medical reporting services.Back