Rate used to calculate personal injury payouts may be set by independent body

Updated: 

Experts may be called in to set a rate used to calculate personal injury payouts following a backlash over surging costs for motorists and the NHS. 

Ministers are considering handing responsibility for setting the formula that must be followed when deciding compensation sums to an independent body.

Under the existing regime the law requires this task to be carried out by the Lord Chancellor. 

When victims of life-changing injuries accept lump sum compensation payments, the actual amount they receive is adjusted according to the interest they can expect to earn by investing it.

That adjustment is called the discount rate.

The measure was at the centre of a furore last month when Lord Chancellor Liz Truss announced that the rate would fall from 2.5% to minus 0.75%. 

Officials insisted that this was the only "legally acceptable" course of action but the decision was greeted with disbelief by the insurance industry, which described the changes as "crazy" and "reckless in the extreme".

Millions of motorists were warned to brace for increased premiums while it is estimated that the NHS will have to find an extra £1 billion to meet increased costs of settling medical negligence claims.

On Thursday the Ministry of Justice (MoJ) launched a consultation to decide whether to change the legal framework that sets the discount rate. 

The MoJ stressed it is not a review of the new rate set in February, but measures under consideration include whether:

:: the current methodology to calculate the rate is appropriate;

:: the discount rate should be set by an independent body;

:: more frequent reviews of the rate are needed; and

:: periodical, rather than lump sum payments, might be a better way to compensate victims.

Ms Truss, who is also the Justice Secretary, said: "I want to make sure that the way in which the discount rate is set remains fit for purpose.

"Awards of damages for life-changing personal injuries are necessarily going to be very large in some cases, but in the interests of society as a whole and the services that underpin it, I want to be sure that the system of compensation is one that compensates claimants properly, but is fair to consumers, business and taxpayers."

The new discount rate took effect last week. Prior to this, it had been unchanged since 2001. 

Claimants must be treated as risk-averse investors who are financially dependent on the lump sum, often for long periods or the duration of their life.

Awards using the rate should put them in the same financial position had they not been injured, taking into account loss of future earnings and care costs.

Ministers say they will bring forward any necessary legislation after the six-week consultation has concluded.

The Government has not singled out a preferred option.