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Keoghs Insight

We keep you up-to-date on emerging market issues and their impact on the insurance sector, through a variety of publications, events and our leading market initiatives.

Author

Mike Renshaw

Mike Renshaw

Partner

T: 0238 190 7019

Personal Injury Discount Rate

Client Alerts||08/09/2017

The Decision

On 7 September 2017 the Government published its response to the Consultation on the Personal Injury Discount Rate. The MOJ considered the 135 responses to its paper and also sought evidence from the Government Actuary Department and British Institute of International and Comparative Law (BIICL). The BIICL research established that in eight different jurisdictions the discount varied from 3.5% to 6%.  None had a negative rate.  

The MOJ response appears to show that decisions have largely being made according to which proposals were supported by the majority of respondents.  

The guiding principle of full compensation is retained but the Government has decided that setting the rate according to the returns on ILGS for a “very risk averse investor”, in accordance with Wells v Wells, is no longer appropriate and may produce significantly larger awards than providing 100% compensation. This is having an adverse effect on the NHSLA, MOD, business and consumers through increased premiums.

The Government has decided that:

1.    The rate will continue to be set by the Lord Chancellor.  

2.    The law will be changed so that:

    a. The rate is set in accordance with expected rates of return on a low risk diversified portfolio of investments.
 
    b. The actual investment practices of claimants and the investments available to them should be considered.

3.    Primary legislation is required to give effect to these changes.

4.    The first review of the rate must be commenced within 90 days of the new legislation coming into effect and concluded within 180 days of commencement.

5.    The rate will be reviewed every three years thereafter.

The new approach breaks the link to Wells v Wells and ILGS and will reflect real world returns on a low risk diversified portfolio of investments. The risk profile of the claimant is increased from “very low risk or no risk” to “low risk”, but additionally the returns are based on a diversified portfolio rather than just ILGS. This addresses the frustrations that many had with the present system which assumed a degree of caution so extreme that the claimant would actually be choosing to make a loss on his damages and achieve a negative rate of return.

The discount rate will be set by the Lord Chancellor having regard to the actual returns that claimants are likely to receive on investments and the availability of PPOs for some or all of the loss.

Timetable

The first review of the rate must be commenced within 90 days of proposed new legislation to give effect to the changes and the decision must be finalised within 180 days of the review commencing. This review will be conducted by the Lord Chancellor in consultation with the Government Actuary and the Treasury.  

The Government remains of the view that it is bound by Wells v Wells and cannot simply change the rate without primary legislation. 

Draft legislation has been published alongside the consultation response and proposes new clauses to be inserted into the Damages Act 1996. The Government could use the Finance Bill to give effect to this but given that they are seeking views on the draft legislation the timescale for that is likely to be too tight. It also does not sit well with the Justice Secretary’s reputation as a careful and thoughtful politician.

If the Brexit negotiations stall it may be the case that the legislation would be passed as early as April 2018.   The Lord Chancellor must then commence a review of the rate within 90 days and conclude it within 180 days of the commencement.  If the full time periods were used then the new rate might not be announced until 9 months after the Bill has been passed.  Even if the Bill is a little delayed there still should be time for the Bill to be enacted in time for the Lord Chancellor to announce a change in the rate between June and September of next year. We anticipate that detailed discussions between the Lord Chancellor, the Government Actuary and the Treasury have already taken place.

Subsequent reviews will be carried out at least every three years and require the Lord Chancellor to consult the Government Actuary, Treasury and an expert panel consisting of an actuary, investment manager, economist and an expert in consumer investments.

The press release for the consultation indicates that if the rate were reviewed now, on the new basis, then it would be between 0 and 1%. That may change if the economic climate has changed by May/June 2018. The increase in the rate will reduce future loss multipliers and therefore damages on higher value claims.  

However the ONS will be publishing its bi-annual mortality data for 2016 in December 2017 and it is expected that this will continue to show that life expectancy has increased above the predictions made in the 2008 data, on which the 7th edition of the Ogden Tables were based. The 2014 mortality data already confirms that life expectancy has risen above projections made in 2008 and the 2016 data is expected to confirm this. Improving life expectancy will give claimants the opportunity to argue for slightly increased multipliers - particularly for males under the age of 59 and females under 35 - who are most affected by the improving life expectancy predictions.  That will limit (to a degree) the reduction of multipliers as a result of any rate change.

We will give guidance on practical considerations around the reform along with views on the draft legislation shortly.   

Keoghs has catastrophic injury expertise in offices in London, Bolton, Coventry, Manchester, Southampton and Glasgow. If you would like to discuss this or any issues relating to personal injury please contact Mike Renshaw, Partner, or our National Head of Catastrophic Injury, Andrew Underwood.