Further discount applied

Last week’s announcement of a new process for setting the discount rate applied to serious injury compensation did not come as quite the surprise that the sudden hike in March did, and the proposals seem targeted on the middle ground between insurers and those representing severely injured accident victims. ARAG’s Product Development Manager Lesley Attu takes a closer look at the announcement.

Liz Truss sent the insurance industry into a tailspin a little over six months ago, when she announced a change to the ‘discount rate” from 2.5% to -0.75%. Share prices dropped, premiums were hiked and the insurers’ PR machines went into somewhat unseemly overdrive, demanding that the ‘crazy’ decision to ensure that people with catastrophic injuries should be adequately compensated, be urgently reviewed.

It may not have come about quite as quickly as some would have liked, but the MoJ’s proposals for a new mechanism to set the discount rate seem designed to strike a compromise. If Lord Chancellor David Liddington’s prediction that the new system would currently generate a rate between 0% and 1%, then it could fall very close to the mid-point between the -0.75% that so outraged the ABI and the 2.5% that it lobbied and fought so hard and for so long to preserve.

The MoJ says it will maintain a 100% compensation rule so that claimants should receive full compensation for the loss caused by the wrongful injury, and not any more, nor any less. It has accepted that the existing legislation governing how the rate is set is unrealistic and could result in awards that significantly overcompensate claimants.

The consequence, it claims, is that the NHS and other public sector bodies can be adversely affected and insurance premiums are inflated.

The MoJ has also acknowledged that injury victims are likely to be more risk averse than ordinary, prudent investors but that “low risk” rather than “very low risk” investments would represent a fairer benchmark. 

Primary legislation is necessary and, once it is passed, the discount rate will be set by the Lord Chancellor, who will take advice from a panel of independent experts. The panel will be chaired by the Government Actuary and will include four other members who will bring experience as an actuary, an investment manager, an economist and a consumer investments expert. HM Treasury will continue to be a statutory consultee for each review, which will take place every three years.

The panel will still be able to set different rates for different types of case, but the principles behind how the rate is set will be set out in the legislation.

So far, the Lord Chancellor’s news has been received more enthusiastically by the insurance industry (and its investors) than those representing injured victims, but only time will tell if the new rate setting mechanism will prove fairer or not.