August 2019 Blog for Claims Magazine

Discount rate change a mixed bag of risks and returns

The recent change to the personal injury discount rate means claimants are still worse off, but just not as much as they could have been - while some insurers were caught resting on their laurels.

It must have come as a nasty shock to the Association of British Insurers (ABI) when the government didn’t do what it was told over the discount rate. After all, if the last decade has taught us anything, it is that the ABI gets its way on personal injury reform.

While insurers were busy releasing millions of pounds in reserves on the basis that the -0.75% rate set in February 2017 would rise to 0% at the very least, one of David Gauke’s last actions as lord chancellor was to put the interests of injured people to the forefront of his mind and set the discount rate at -0.25% instead.

Any higher and the danger of claimants losing out was too great, according to his statement of reasons. It appears that the government actuary recommended a figure of 0.25%, but on that basis there was only a 50:50 chance of a claimant being fully compensated, and Gauke considered this too great a risk of under-compensation.

The ABI is angry, while the likes of Direct Line and Hastings have had to bolster their reserves (£17 million and £8.4 million, respectively).

The accompanying impact assessment said insurers would save £230-320 million as a result of changing the new discount rate, but the ABI said this “completely misrepresents insurance market pricing and reserving” that followed the old rate being set.

It was particularly sore about Ministry of Justice “guidance” to the stock market in September 2017 that it expected a new rate to be set at 0-1%, which the ABI said ensured that lawyers did not adopt the -0.75% rate in practice. As a result, it said, premiums have fallen and the majority of personal injury cases have settled at a rate between 0% and 1%, “as the government intended”, and so there would be no savings to pass on.

But let’s look at that more closely. In September 2017, the then lord chancellor said: “While it is difficult to provide an estimate, based on currently available information if the new system were to be applied today the rate might be in the region of 0% to 1%.”

Minister Lord Keen told the Justice Select Committee soon after that 0-1% was “an assessment of the direction of travel of the rate … I emphasise that it was not intended as an estimate of what the rate will be”.

This could not have been much further from a guarantee. So, insurers that reserved on that basis were complacent. You can see why they would assume the discount rate would rise substantially, given the speed with which the review was initiated in the first place in 2017, but there are no grounds for sympathising with them.

Though the ABI is reportedly considering a possible judicial review, my guess is that it will be hard to get off the ground—could it really be said that Gauke’s decision was so unreasonable and based on no evidence that it must be overturned?

You can be sure that the complaints will go on, and indeed intensify in the run-up to the next review in five years’ time, but at least we have the luxury of certainty until then—it’s a rare commodity in the personal injury world right now.

But those protecting claimants shouldn’t get too giddy—the rate was set under the new methodology introduced by the Civil Liability Act, meaning it was judged on the basis of the typical claimant putting their compensation into a low-risk investment portfolio.

The actuarial assessment showed that, had the previous methodology been retained - setting the rate with reference to a very low-risk investment portfolio of index-linked government gilts - it would have to be changed to “around -1.5% or even lower”.

So claimants are still worse off, but just not as much as they could have been.