www.newlawjournal.co.
uk | 15 December 2017
Full compensation
& the discount rate:
revisited
Julian Chamberlayne reviews the Justice
Committee’s report on the discount rate
T
he Justice Committee acknowledges
early in its recent report, issued
as part of its inquiry into draft
legislation related to the personal
injury discount rate that ‘a negative discount
rate was counterintuitive because it requires
that a sum paid now will be worth less in the
future. It is usually the other way around:
people would ordinarily expect to earn a
positive return on the sum received,` (see
Pre-legislative scrutiny: draft personal injury
discount rate clause, 30 November 2017).
This quote reminded me of Daniel
Kahneman’s seminal work, Thinking, Fast
and Slow. Kahneman observed that our initial
reactions are frequently directly contrary to
what careful analysis of statistics and evidence
would lead you to. The Justice Committee
quite rightly flagged the danger of thinking too
fast on this issue commenting: `The evidence
currently presented by the Government
concerning claimant investor behaviour is
thin`. Sensibly, the committee has called on
the Government to clarify its aims, gather
proper evidence about how claimants invest
lump-sum damages and ensure adequate
safeguards to prevent under-compensation of
the most vulnerable claimants.
The Justice Committee also recognised that
there were other aspects of the law of damages
that needed to be addressed in tandem with
any discount rate change. They hoped the Civil
Procedure Rule Committee would look at the
Pt 36 point made by the Forum of Complex
Injuries Solicitors, in its submission to the
inquiry, that insurers should not be allowed
to put financial pressure to settle on seriously
injured claimants without offering them
periodical payment order (PPO) terms.
The committee also picked up on a point
made by my firm, Stewarts, in its submission
that `until claimants are fully compensated
for accommodation loss, this will continue
to be a driver towards lump sum rather than
PPO settlements. Reforming compensation
Personal injury LEGAL UPDATE
© iStock/phototechno
for accommodation losses is an aspect of the
consultation on the law of damages back in
2007 and it is high time the Government dusts
off those responses and takes action`.
It is telling that those consultation responses
on numerous important compensatory
issues (including the incompatibility of the
Fatal Accidents Act 1976 with the European
Convention on Human Rights) have been
ignored for 10 years, whereas within weeks
of the change to a negative discount rate
announced earlier this year the insurance
lobby had forced the Government into action.
The challenge of the evidence gathering
exercise called for by the Justice Committee
contrasts with the compelling simplicity
of continuing the ILGS (index linked gilts)
approach that followed Wells v Wells [1999]
AC 345, [1998] 3 All ER 481. One of the real
beauties of ILGS as a proxy for the discount
rate is that it is the only measure which avoids
crystal ball gazing about both inflation and
investor returns.
A further factor that the Justice Committee
recognised is that not all claimants would
seek investment advice and so we cannot just
try and look at the evidence from investment
advisers to get the full picture. Richard
Cropper, an investment adviser who has spent
his whole career providing financial advice
to recipients of personal injury damages,
gave evidence to the committee that: `I have
clients who unfortunately have less than 10
years to live. They have no capacity for loss, so
they are in cash….They are getting a negative
3.5% yield and net. They are being woefully
undercompensated, even at the current
discount rate`.
Cropper further explained that his advice
to claimants was predominantly based on
their needs rather than the risk profile. He
highlighted the following danger: `If we set
the discount rate by reference to past returns,
which is the only way in a basket, then we are
going to find ourselves increasing the discount
13
rate at the peak and reducing the amount of
compensation to a claimant who then has the
most investment risk – having to invest today
at what feels like an elevated price`.
The courts are well-known for thinking
slow, rather than fast, and requiring
compelling evidence. Each time in recent years
when such evidence has been presented to
common law courts they have settled upon
a negative discount rate conclusion and also
allowed 1.5%-2% differential for earnings
inflation: see Helmot v Simon [2012] UKPC
5 and the Bermuda Court of Appeal decision
Thomson v Thomson et al No 14 of 2015. No
doubt careful thinking is behind the cautious
reserving for PPOs by insurers, (-1.55-2% and
by the Government at -0.8%).
Likewise the expert report commissioned
by the Ministry of Justice (MoJ) in 2015 was a
further example of thinking slow pointing to
a more cautious approach and likely negative
discount rate. Perhaps Justice Minister Lord
Keen is starting to realise this when, before the
committee, he appeared to backtrack from the
indicative 0-1% rate that had been suggested
when publishing the draft legislation: `I
emphasised that it was not intended as an
estimate of what the rate will be. With the
benefit of hindsight, it is perhaps unfortunate
that the figure was there, but it was just to
indicate the direction of travel when you
moved the risk element of the portfolio.`
The committee was also critical of the
Government’s impact assessment and made
the important observation that: `We do not
think there is sufficient evidence for the
Government conclusion that its proposed
legislation is a proportionate means of
achieving a legitimate aim, so as to justify
possible disadvantages to those with protected
characteristics. Indeed, without adequate
evidence about the potential characteristics of
claimants, or the cost to claimants, it is hard to
see how the Government can draw any sound
conclusion about proportionality`.
The Government has said repeatedly that
it intends to preserve the full compensation
principle. Even the insurance lobby says
that it subscribes to that principle, but there
is no such thing as an average claimant
and we cannot have a system in which a
substantial minority of severely injured
are, through no fault of their own, seriously
undercompensated. It was heartening to
see the Justice Committee recognise this.
We can only hope the MoJ will think slowly
about this issue, undertake the necessary
research and at the same time address
the related issues concerning the law of
damages. NLJ
Julian Chamberlayne, partner & head
of International Injury at Stewarts (www.
stewartslaw.com) & chairman of the Forum of
Complex Injury Solicitors.