Following the Lord Chancellor’s announcement earlier today, that the Personal Injury Discount Rate in England and Wales has been increased – effective January 11th January 2025 – from -0.25% to +0.5%, Jonathan Edwards, partner and head of Insurance & Risk said:
“The new PIDR is very good news for insurers, as it will hopefully begin to mitigate significant claims inflation over recent years, fuelled by the ever-increasing cost of living, potentially freeing up funds for insurers to utilise elsewhere. This puts England and Wales on par with Scotland and Ireland, having revised their rates earlier this year. Insurers will be reviewing outstanding settlement offers and reserves in advance of the new rate coming into force on 11 January 2025.”
OVERVIEW
On 2 December 2024, the Lord Chancellor announced that the Personal Injury Discount Rate (PIDR) in England and Wales will change to +0.5% on 11 January 2025, mirroring the rate change already made in Northern Ireland and Scotland.
This significant change to the PIDR will have favourable financial implications for participants in the insurance industry.
THE DISCOUNT RATE
The PIDR is used by courts in assessing the size of future loss awards in personal injury cases. As a matter of principle, damages awards should, as far as possible, put claimants in the same position as they would have been in, if the accident had not taken place. The PIDR is used to achieve this objective.
When a person sustains a serious injury, their claim settlement is generally made up of several components, including compensation for pain, suffering and loss of amenity, as well as financial loss and expenses associated with the injury.
A percentage figure is used to discount awards of damages for future losses and expenses. This accounts for the accelerated receipt of funds, as against investment returns from the lump sum, adjusted for future inflation and taxation. It is this percentage figure which is referred to as the PIDR, and which has been the subject of today’s announcement.
WHAT HAS CHANGED?
The PIDR has changed from -0.25% to +0.5%.
When the PIDR is less than zero (as it has been for the last seven years) damages are calculated with an additional amount to reflect the likely negative rate of return of investment of the lump sum. By contrast, a positive PIDR results in a deduction from the lump sum payable, on the basis of an expected positive rate of return on investment of the lump sum.
To demonstrate the difference in damages received pre-and-post announcement, we have taken the example of a 24-year-old woman with pre-incident earnings of £20,000 (net) who will not work again. Under the existing PIDR, she would recover circa £732,400 for her lost future earnings. Under the new PIDR, she would recover circa £625,000 – amounting to a reduction of £107,200. The effect when taking into account all future heads of loss, over a full book of business, are clearly significant.
WHAT NEXT?
The new PIDR will apply to all claims settled in England and Wales from 11 January 2025. The full statement of reasons for the decision is expected to be published imminently. We will shortly provide further commentary on this and the industry response.