From ‘crazy’ to constructive – sorting out the Discount Rate mess

James Dalton

16 March 2017

This post first appeared in the Insurance Post online on Monday 13th March.

James Dalton, Director, General Insurance Policy, ABI

James Dalton, Director, General Insurance Policy, ABI

I am living the discount rate at the moment. I have lost count of the number of meetings I have attended, legal opinions I have read and conversations with insurance company CEOs I have had on this complex issue. All very necessary of course, given the massive importance that this has for our industry and customers, not to mention other bodies like the NHS. As we switch from consternation to constructive mode, our focus is now on working with the Government to find a solution to the problem that the Ministry of Justice has created as a result of muddled thinking, poor legal advice and intransigence. In particular because:

-Despite Liz Truss stating that -0.75% was the only legally acceptable rate that could be set, she had a range of options under the 1996 Damages Act.

-By announcing a new rate at the same time as announcing a consultation exercise as to how the rate should be set, she implicitly recognises that the formula she has used for setting the rate is wrong.  Otherwise why consult, especially when the same issues have been live and unanswered since consultations were run in 2012 and 2013?

-A discount rate that assumes that claimants invest 100% of their compensation in Index Linked Government Securities (ILGS) bears no resemblance to what prudent claimants do in practice, and ignores the most basic of investment advice not to put all eggs into one basket.

At the hastily convened meeting with the Chancellor of the Exchequer the day after the new rate was announced, CEOs from 15 leading insurers told Philip Hammond three key things. Firstly, discount rates operate in this way across the world and the UK is the only major developed country to have a negative rate.

Secondly, that Liz Truss’ decision to use a broken formula to set the rate has raised serious questions in the financial capitals of the world about the attractiveness of the UK as a place to do business. Thirdly, given the size of the cost increase, that there would be an immediate and on-going impact on insurance customers, especially higher risk groups like young and older drivers.

And it is those customers who cannot afford for the Government to kick this issue into the long grass – the test will be whether the law can be changed and a new discount rate set this year. We need  certainty on a formula that:

-Delivers full and fair compensation to claimants.

-Takes account of how claimants actually invest their money.

-Recognises that claimants generally have a low-risk not no-risk appetite, and that Periodical Payment Orders are available to them if they want a ‘no-risk’ option.

-Is not tied to only one class of investment.

-Is set through an open process with proper consultation of experts, including both insurers and personal injury lawyers.

Without this, the price impacts which many motor and business customers will already be noticing, are only likely to get worse.

This all needs to be delivered through a legislative amendment, and we believe that the window of opportunity to achieve this is currently provided in the form of the Prisons and Courts Bill. We need to persuade the Government that this is the way to go. But with Parliamentary time likely to come under extreme pressure once Article 50 has been triggered, time is tight.

For millions of insurance customers and thousands of claimants this is too big an issue to be left unresolved. The insurance industry must keep up the pressure for change and the ABI will continue to lead efforts to do so.

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