Personal Injury Discount Rate (PIDR) Update: A broker’s perspective

Introduction

The Personal Injury Discount Rate (“PIDR”) is also known as the ‘Ogden’ rate. It is used in the calculation of an award of compensation in the event that someone suffers and brings a claim for, a serious injury or fatal accident.

The approach is based upon the principle that where someone is awarded a payment following a claim, they could invest that sum of money and receive a return on their investment. This would provide them with a future source of income. This could then be used to pay for any future care, treatment or related services and loss of earnings. In simple terms, the PIDR is a percentage discount rate. This percentage figure is used to calculate the amount a successful claimant could realistically expect to earn in interest. This is then discounted from the agreed full compensation award.

The PIDR is considered to be a critical factor in calculating future financial losses for Claimants in personal injury cases. This is because it reflects the likely rate of return on investments made by Claimants who receive ‘lump sum’ payments as compensation.

According to the Civil Liability Act 2018, the PIDR rate must be reviewed every 5 years. An independent expert panel, chaired by the Government Actuary, must be consulted for each review.

This document consolidates the recent updates regarding the PIDR in England, Wales, Scotland, and Northern Ireland, following the Government Actuary Department's (GAD) reviews.

Recent Changes in Scotland and Northern Ireland

On 26 September 2024, GAD published the results of its review of the PIDR for Northern Ireland and Scotland. This lead to significant changes effective from 27 September 2024. The new rates are as follows:

• Scotland: Increased from -0.75% to +0.5%
• Northern Ireland: Increased from -1.5% to +0.5%

These changes mark a shift from negative rates, which had been in place since 2017, reflecting improved investment returns.

Recent changes for England and Wales

The review for England and Wales commenced on 15 July 2024, with a deadline for setting the new rate by 11 January 2025. After months of speculation, on the 2nd of December 2024, The Lord Chancellor, Shabana Mahmood, set the applicable personal injury discount rate for England and Wales at +0.5%, effective from 11 January 2025.

You can read the official statement from the UK Government here.

Impact on Existing Cases

The recent changes in Scotland and Northern Ireland confirm a trend of improving investment returns, and this has clearly influenced the PIDR in England and Wales positively. Legal professionals are advised to review ongoing cases, especially those involving Part 36 offers, as the new PIDR may significantly impact settlement values.

Examples of the impact on compensation awards

Example 1: Claimant with a £100,000 claims for future loss of earnings

• Previous Rate: If the PIDR was set at -0.75%, the calculation for future losses would assume a negative return on investment, leading to a higher lump sum award to compensate for the lower expected returns. For instance, a £100,000 award might be calculated to cover future losses over 20 years, resulting in a total payout of approximately £130,000.
• New Rate: With the new PIDR of +0.5%, the calculation assumes a positive return. This could reduce the lump sum needed to cover the same future losses to around £115,000, reflecting the improved investment outlook.

Example 2: Claimant requiring long-term care needs claim of £500,000

• Previous Rate: A claimant requiring long-term care with an estimated future cost of £500,000 over 30 years may have received a lump sum of approximately £650,000 under a negative PIDR, accounting for the lower expected returns.
• New Rate: With the PIDR set at +0.5%, the lump sum required could decrease to around £575,000, as the positive rate allows for a more favourable investment return on the awarded amount.

Example 3: Impact on Insurers

• Insurers will need to adjust their reserves to account for the new PIDR. For instance, if an insurer had set aside £1 million to cover potential claims based on a negative PIDR, they may now find that they can reduce this reserve to approximately £900,000, reflecting the lower lump sums required due to the positive PIDR.

Conclusion and how to achieve the best market outcomes

The announcements of the new PIDRs brings much-needed clarity to the compensation landscape for personal injury claims. It is estimated that the upward revision of the discount rate to 0.5% is likely to save insurers around £150,000,000 per annum and public bodies (e.g. the NHS/NHS Resolution) approximately £200,000,000 per annum.

The prevailing insurance market therefore provides some opportunity for savvy policyholders to capitalize on favourable conditions. Achieving the best market outcomes requires a proactive approach to managing risk and claims profiles.  Working alongside Marsh, there are some key strategies that can help you showcase yourself as a lower-risk policyholder:

• Accurate and detailed exposure data with supporting information that instils underwriter confidence.
• Evidence of effective risk management showing continuous improvement and high/increasing claims defensibility.
• Robust claims handling with reserves challenged and reviewed to reflect the developing claim and other economic changes.
• Cleansing of claims experience with file audits where necessary.
• Engaging with the market and evidencing that you are a proactive, and therefore appealing policyholder.

Future Reviews

The PIDR will be reviewed again within five years, and stakeholders should remain vigilant for any further developments that may arise in the interim.