Yesterday's news that the Government Actuary has recommended the Scottish personal injury discount rate be fixed at -0.75% will be a very disappointing outcome for the insurance industry and is likely to impact on insurance cover costs for businesses across the country, says Kate Donachie, a managing associate at Brodies LLP who provided evidence to the Scottish Parliament on the proposed legislation.
Bound by the Damages (Investment Returns and Periodical Payments) (Scotland) Act 2019, the Scottish Government must now implement this recommendation.
But what is the discount rate and what are the implications for insurers and claimants?
The lower Scottish rate means that damages awarded in Scotland will be higher than in England and Wales. This will result in higher costs to insurers and Scottish public bodies who self-insure, such as NHS Scotland and several local authorities. It is also likely to impact on consumers through the price and availability of insurance cover in Scotland.
The differential between jurisdictions across the UK, may well result in some individuals seeking to raise claims in Scotland, rather than England and Wales. It is feared that this approach known as forum shopping - will, in turn, cause more focus on where claims are raised; bringing delays and higher costs.
The incentive to raise claims in Scotland may also drive up fraudulent claims activity north of the border. At present Scotland experiences relatively low levels of organised fraud in the claims sector. However that may not remain the case in the context of several changes to the claims environment.
In England and Wales, a claim which is genuine but significantly exaggerated (fundamentally dishonest) can be dismissed by the Court in its entirety. In Scotland the genuine core of a claim cannot be dismissed; notwithstanding fraudulent exaggeration, and the claimant will receive compensation for that genuine element.
This different response to fraudulent claims will soon be coupled with lower damages in England and Wales for whiplash injuries and following yesterday's news _ with substantially lower damages for future losses. Furthermore, in Scotland, 2020 will see the introduction of QOCS; whereby a losing claimant will only be liable for the defender's legal costs in limited circumstances.
In short, the benefits to be reaped from a fraudulent claim are increasing when, at the same time, the consequences of the fraud being apprehended are lessened.
The discount rate
The discount rate is a tool used in personal injury actions to calculate a lump sum which reflects a loss that has not yet occurred and will actually accrue over several years in the future. Often the loss will relate to earnings or the cost of future care.
The discount rate broadly reflects the return which can be earned from the lump sum if it were invested by the affected individual; on the basis that the full loss is being paid now, and not incrementally in the future.
What is the current discount rate?
Between 2001 and 2017 the discount rate in England and Wales and in Scotland was 2.5%. This resulted in the total of the incremental losses being reduced, to reflect the likelihood that an injured person could generate a positive return on investing the damages which had been paid in advance.
In 2017 the discount rate north and south of the border was reduced to -0.75% to reflect the assessment that the damages invested would make a loss. The resulting lump sum was therefore greater than the total of the losses.
Following review, the discount rate in England and Wales has been -0.25% since 5 August 2019. Accordingly, it is likely that we will now have different discount rates north and south of the border for several years to come.
What might happen next?
The equivalent legislation in England and Wales, the Civil Liability Act 2018, provides for a scheme requiring insurers to report to the FCA with information about savings made and the impact on premiums. However the details of that scheme are not yet known and the Scottish legislation contains no equivalent requirements. Accordingly it may be difficult to accurately measure the cost of the lower rate and higher damages in Scotland.
One of the key differences between the methodology used north and south of the border is the assumed investment period; 43 years in England, 30 in Scotland. The insurance industry argues that the average life expectancy in claims using the discount rate is far greater than 30 years. However, for claimants, the argument is that too long an investment period will result in those with shorter life expectancies being undercompensated.
A system where there are two rates, applied depending on the period of loss, is allowed by the Scottish legislation and was introduced in Jersey. If the impact of different rates is shown to be significant, there may be a call for dual rates in Scotland at the next review; which will take place within five years.
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