Proposed changes to Northern Ireland discount rate expected
Developments in relation to proposed changes to the discount rate in Northern Ireland have long been awaited and whilst the rest of the UK has forged ahead implementing new methodologies to their discount rate, the lack of any government in Northern Ireland led to uncertainty and complaints of discrimination by claimant representatives.
With the seat of government barely warmed, following a three year hiatus, a letter was sent on 27 February, from the Deputy Director of civil justice policy decisions, proposing that a new rate should be set at minus 1.75%. This unexpected proposal was established by applying the old Wells v Wells approach and as such, will lead to potentially significant over compensation for claimants.
Under the Damages Act 1996 (the Act), the Department of Justice (DOJ) is responsible for setting the discount rate in Northern Ireland. The Act requires the DOJ to consult with the Government Actuary and the Department of Finance and it seems clear that this statutory consultation is all that will occur as there has been no indication that a public consultation will be considered for this initial rate change.
The DOJ will, in due course, ‘give consideration’ to reviewing how the rate in Northern Ireland is set. However, whilst any review of the legal framework would require primary legislation, for now the rate must be set in accordance with the decision made in Wells v Wells , in which claimants must be assumed to be “very low risk investors”. There has been no indication of when the DOJ will consider reviewing how the rate is set in the future, but due to the three year absence of government, we do not anticipate this will be any time soon and certainly not before the end of the year. When they do, we would expect a public consultation on any newly proposed methodology.
In catastrophic injury and medical negligence cases, reserves for insurers and the Health Service Trusts will increase dramatically if this proposed rate is implemented. This comes at a time when we are seeing increasingly more care and forensic accountancy reports on future loss reports in middle value personal injury cases, where the injury is not life changing.
The Ogden tables (7th edition) do not make specific provision for a rate of minus 1.75%. We would assume that dependant on timings, that the awaited 8th edition would incorporate this rate, or we would expect a supplementary table to be published, as we saw with the change in E&W. That said, based on our understanding of the likely approach, the table below, provides an illustration of how the proposed rate may dramatically affect reserves for an 18 year old female claimant with a £25,000 loss to age 65 and a £75,000 loss for life.
Rate in E&W
|£25,000 loss to age 65||£1,804,250||£1,228,750||£688.250|
|£75,000 loss for life||£11,745,750||£6,042,000||£2,502,000|
As you can see, applying the proposed rate would see an increase of in and around 5 times what is currently paid out in Northern Ireland and double what is currently being paid in E&W. It is easy therefore, to see how this change will have considerable ramifications for the compensators in this jurisdiction.
At this stage, the rate has not been changed, however, insurers may wish to review large reserves where there is a future care claim and, particularly, in cases of catastrophic injury to understand what reserves may look like using a rate of minus 1.75%.
Another consideration is whether this proposed change may lead to a breach of policy limits leaving an Insured underinsured in catastrophic actions which may lead to increases in the limits of cover and in premiums.
As Northern Ireland does not have Part 36, payments into court may need revisiting if the rates is applied and defendants’ have made payments into court on the existing rate .
We expect to see adjournment applications for serious personal injury actions listed for trial in the next few months from claimant’s solicitors, eager to wait for developments on the discount rate.
Since the implementation of the new rate in E&W, claims in Northern Ireland have already been considered somewhere between 0% and 1% in without prejudice joint discussions.
This proposed rate seems to be a “fait accompli” due to the statutory nature of the consultation as indicated by the DOJ and we are concerned that given the fragility of the power sharing executive that what is said to be an interim position before legislation is passed, could become more permanent in nature. We are keeping a close eye on developments and will update once a proposed timeline is known.