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Discount rates and Structures (Summer 2001)

 

PLEASE NOTE THIS ARTICLE PREDATES THE LORD CHANCELLORS SETTING THE DISCOUNT RATE. DESPITE THAT THE ARGUMENTS IT EXPRESSES ARE STILL VALID

 

Many people in the legal side of the health industry will remember all to well the great debate about discount rates and multipliers in the mid 1990's. This culminated in the House of Lords giving heir opinion in the case of Wells -v- Wells et al. For those new to the field when the courts make an award of compensation for injuries it is normally calculated as an amount needed per year, multiplied by a factor to represent the period of loss. This factor, the multiplier, depends both on the total period of loss, and the rate of interest the claimant can be expected to achieve on the capital of the award before it is used up. The lower the rate of interest assumed, the discount rate, the larger the multiplier, and so the larger the award.

This debate is now back in vogue. Wells -v- Wells et al set the rate at 3% where it has remained until now. However in recent months some court has started looking at reducing this rate to 2.5% or lower. This could have a significant effect of the size of clinical negligence claims and so will be of interest to many readers.

We also current have the Lord Chancellor inviting responses to a consultation paper which looks both at this issue and the alternative way of awarding damages, which is as a Structured Settlement. This is a way of damages being paid by way of a series of regular payments for the claimants' life. Due to tax advantages and uncertainty over the future of the money from a conventional award they can prove advantages to claimants, while providing both a cash flow advantage to the defendant and possibly reducing the total compensation bill.

One of the problems of structured settlements, which can side step the whole problem of the multiplier and discount rate, is that they are relatively rare. This means that the commercial providers who can underwrite the structures, are unwilling to provide quotations unless they know they will get the business. As most health authorities underwrite their structures them selves they can not avail themselves of the quotes. This means that Health Authorities are unable to properly assess the benefits of a structure.

Of perhaps even greater concern is that the market for commercially provided structures is very small. Normal market pressures on price do not therefore aptly. Those structures that are initiated are therefore more expensive than perhaps they need to be, so less are completed and so the circle starts again.

The only way to break the circle is for defendants, and in particular health authorities, to consider implementing structures more often. This will, in the longer term, help reduce the overall spending on compensation without reducing the level of compensation for claimants. It also has the rather nice side effect of removing the continued uncertainty over what discount rate is needed and the large fluctuations when it changes.

 

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