No change in Scotland’s discount rate is a minus move
The Government Actuary Department (GAD) has published their determination of the discount rate in Scotland, concluding that it should remain unchanged at minus 0.75%. Under The Damages (Investment Returns and Periodical Payments) (Scotland) Act 2019 (the Act) this rate took effect on 1 October 2019 and is likely to prevail until reviewed in 5 years.
Differences across the UK
In England and Wales, the rate was set at minus 0.25%, effective from 5 August 2019 and in Northern Ireland, the absence of a devolved Assembly means that it remains at 2.5%. It is likely that Northern Ireland will eventually follow the English position but why is Scotland different? The notional portfolio applied by the GAD is more prudent in Scotland as it is based on a 30-year portfolio (as opposed to 43 years in England and Wales) and, after applying a 0.75% deduction for tax and expenses, a “further margin” of 0.5% has been built in.
Whilst we anticipated that there would be a different discount rate for Scotland, and one which would be worse for insurers, until recently we did not expect that it would remain so low. Fortunately, many insurers took the decision to wait and see before amending their reserves on Scottish cases and that approach has been vindicated.
Since the move away from 2.5%, settlements were routinely agreed with reference to calculations based on 0% and above but now we have certainty, it will be difficult for insurers to secure settlements on that basis. Although it still remains open to parties to negotiate lump sum settlements based on lower figures. In the most serious of cases, such large figures can be difficult for a pursuer to turn down but they can insist on the correct rate being applied. Importantly, the courts will be bound by the minus 0.75% rate and historically high value cases have run closer to Proof (Trial) than in England and Wales.
The impact will be felt most keenly in catastrophic injury cases – for example:
A 24-year-old administrator with a spinal cord injury resulting in paraplegia - some residual earning capacity and care is required for waking hours only:
The £1 million difference is entirely down to the application of a different discount rate and in cases involving brain injury the difference may be as high as £3 million.
Fatal damages claims
It is useful to consider fatal damages claims when looking at the widening gulf between the two jurisdictions. The availability of a civil jury trial along with the number of relatives with title to sue under the Damages (Scotland) Act 2011 has seen fatal claims increase significantly over the last few years. The discount rate will now add more to a dependency claim which is already calculated with reference to a statutory 25% deduction for personal expenditure.
For example - a 22-year-old married deceased, survived by his widow, parents, grandparents and three siblings could be worth in the region of £2 million, even based on modest pre-accident earnings. In England and Wales, the same case is currently worth around £800,000 – some 60% less.
The Act will introduce court imposed periodical payment orders (PPOs) for the first time in Scotland. A potential knock on effect of higher lump sum awards could be to put a halt to PPOs before they have even begun. The Act obliges courts to have ‘special regard’ to a pursuer’s preferences and it is easy to see where those preferences might lie when tempted by a significant lump sum and the ability to invest on terms that are much more favourable than the prevailing discount rate.
We must consider the potential for ‘forum shopping’, where claimants might look for any connection to enable them to bring their case in Scotland. Legislation, such as the Fourth Directive in motor cases, can at least give the Scottish courts jurisdiction even where the accident has happened elsewhere, but Rome II governs choice of law so perhaps some inventive arguments around the interpretation of that legislation can be expected.
Policyholders in Scotland may find an increase in insurance premiums, although given the relatively low volume of such claims in Scotland compared to England, such an increase may be relatively modest.
We expect pursuer firms to be much more bullish when it comes to insisting on applying the rate of minus 0.75% and high value injury claims will be worth more in Scotland than they are elsewhere across the UK. That will undoubtedly have an impact on the overall cost of claims, and the cost for insurers of writing business in this jurisdiction.