Well that was short-lived – the discount rate set to change again

It is well known throughout personal injury litigation that the then Lord Chancellor caused considerable consternation within the insurance industry when on 27 February 2017 she announced a reduction in the discount rate from 2.5% to -0.75%.    A change in the discount rate was long overdue, with catastrophically injured claimants either having a negative return on their compensation or being forced toward a riskier investment profile in order to try and achieve the returns needed. Notwithstanding the fact a change (and most likely a reduction in the rate) was inevitable, it would be fair to say that those representing the insurance industry were surprised at the level of reduction and reacted somewhat angrily to the announcement.

Perhaps knowing how the insurer sector would react, when announcing the reduction in March,  the Lord Chancellor made clear there would be a prompt review of the current basis upon which the discount rate is set to ensure it remained “fit for purpose”.  Such a review was to include whether the rate should be set by an independent body; whether more regular reviews would provide more certainty and whether the methodology in setting the rate i.e. that the claimant only invests in no low risk ILGS remained appropriate for the future.

The consultation has taken place with the Lord Chancellor publishing the findings and draft legislation on 7 September 2017.  The salient points are :-

• The assumptions currently made on how claimants invest their compensation were considered unrealistic and that broadly claimants do not invest in ILGS only.  Unsurprisingly, there was a diversity of responses between those representing claimants who considered no risk investments were appropriate, with those representing the insurance sector taking the view that claimants, whilst remaining low risk investors, should not have no risk.  The government it seems, prefers the view of the insurance sector, taking the view that the current assumptions “may” lead to recovery of compensation in excess of 100% , displacing the 100% rule and resulting in “additional cost” to taxpayers (through the additional cost to the NHS and other public bodies of higher awards) and consumers in higher insurance premiums.
• There needs to be more structure to reviews to provide more certainty and predictability, with a compromise of 3 yearly reviews to take place.
• The government preferred the insurers’ stance that the setting of the rate needed ultimate government accountability, with the setting of the rate to remain with the government who will seek expert guidance from an independent panel.

In summary, the government concluded there needed to be a clearer and fair means for setting the discount rate and confirmed there would be a change in the law, with rate to be set by reference to a diverse portfolio of low risk investments, rather the present assumption of no risk investments.   The consultation paper makes clear than when the assessment is undertaken, actual claimant investments practices should be considered to enable the rate setting to be more realistic.

The principles for setting the discount rate will be set in statute and the current rate will be reviewed “promptly” once legislation is in force, with reviews to be three yearly thereafter (and being completed within 180 days of commencement).

Finally, the setting of the rate would remain the remit of the Lord Chancellor, with advice taken from an independent expert panel.

The draft legislation has already been published and is advanced for parliamentary approval

So what do these changes mean for the injured claimant who is at the centre of these arguments? These are people who are often catastrophically injured.  Claims are not brought because an injured party wants to pursue a claim at a cost to the taxpayer or consumer, but rather that they have a real need.  Injured claimants never choose to be injured leaving them with life changing injuries.  They are injured due to the fault of a third party; this simple fact is often lost in the popular press.  They are not “money grabbing”, but simply looking to recover compensation to help provide them with a better quality of life.

First indications suggest that following the ‘prompt’ review the discount rate will move upwards from the current -0.75% to somewhere between 0% to 1%.  The effect will be a reduction again in lump sum compensation awards to claimants who have the most need.  However, it is not likely to have a dramatic effect on consumer insurance premiums;  these are not likely to fall in the short term, despite insurers responding very quickly to the reduction in the discount rate in March to pass this cost onto the consumer in an average increase in premiums of £75 per policy.  It is unlikely the insurance sector will be a quick to reduce premiums when, as is likely, the discount rate is increased from the current -0.75%.

From a practical perspective are we likely to see insurers pulling away from agreeing settlements or attempting to adjourn trials in order to await the review that the Lord Chancellor has intimated will happen prompt after legislation is in force.  That could take many months and it will remain to be seen how far those representing insurers will go to avoid settlement at the current -0.75% rate.