Thousands of people every year suffer the kind of tragic injuries that mean they will spend the rest of their life receiving medical treatment and care. No amount of financial compensation can make up for that but insurance is there to help people get their lives back on track. The real difference this makes to injured people is one of the things that makes me proud to work for the industry I do.
Working out how much compensation claimants who suffer a catastrophic injury should receive, however, is a complex process that has to take into account many things, including the cost of care, ongoing treatment and loss of earnings. Payments are then made in either a lump sum or over time. Nearly nine out of ten claimants opt for a lump sum, which is adjusted to take account of how much claimants can be expected to earn each year when that lump sum is invested. This adjustment is called the discount rate (or Ogden rate) and since 2001 it has been set at 2.5%, meaning claims have been reduced in line with this.
Last December, after the threat of being judicially reviewed by the Association of Personal Injury Lawyers, the Lord Chancellor suddenly announced plans to change the discount rate and a decision is expected imminently. We took the Lord Chancellor to court and despite the many shortcomings in the process to date, our attempt to prevent her taking the decision without further consultation was rejected.
We may have lost in the courts but the Ministry of Justice still has to get its understanding of the implications right. To date there is little evidence of that happening.
Here are five reasons why a significant downward change in the discount rate would be wrong:
1 – Bad methodology. The plan to base the rate on one measure (Index-Linked Government Securities) doesn’t reflect how people actually invest their compensation. The reality is that nearly everyone paid large amounts of money in a lump sum will see an Independent Financial Adviser and invest in a range of assets. If the rate is to be a fair reflection of the real world, it should be based on a much wider range of investments more akin to an inflation style ‘basket of goods’, not just one option rarely used in practice.
2 – Bad for drivers, particularly younger ones. Given the enormity of the potential increase in claims costs, it is inevitable that a significant reduction in the discount rate will lead to an increase in motor and liability insurance premiums for everyone. But the greatest cost increases are likely to be borne by those “just about managing” and who already pay the highest premiums because of the greater risk they represent, such as younger and much older drivers.
3 – Bad for business. Many businesses buy motor and liability insurance and this will drive up costs at a time of uncertainty in the economy. Some, like bus companies or road hauliers will be particularly affected. This is not only due to the significant risk they present but because, given the smaller number of insurers selling this insurance, any changes in their appetite for business could have a greater impact on capacity in the market.
4 – Bad for the NHS and other public bodies. Insurers aren’t the only ones who pay compensation to injured claimants. Public bodies, particularly the NHS, will be affected by this change. With clinical negligence claims costing the NHS in England over £1.5 billion last year, a change in the discount rate at a time when NHS budgets are already under extreme pressure could have a very serious impact.
5 – Bad for insurers. The UK is a global centre for insurance. It employs over 300,000 people and contributes £12 billion a year in tax. Like all major sectors of the economy we need political stability to operate effectively. Taking such an important decision for this world leading sector and our customers with no warning and because of threats from the personal injury lawyers undermines that, especially in a closed period when firms are restricted in what they can say in public about the possible impacts.
We do not expect the discount rate to remain frozen. The ABI has repeatedly said that we are open to a proper dialogue and process for reform. It is vital people who are seriously injured are properly compensated. A discount rate that takes into account how claimants actually invest their compensation and the modern realities of the investment environment would achieve this. But rushing out a revised rate in response to a legal threat from personal injury lawyers is not the way to go about achieving it.
Find out more about the Discount Rate here.