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.
