The House of Commons Justice Committee has called for greater clarity and evidence from the UK Government in response to intended amendments to the Ogden discount rate.
The personal injury discount rate in the UK, also known as the Ogden rate, was cut from 2.5% to -0.75% at the start of 2017, a move that surprised many in the motor industry and which impacted both the reserving and profits of numerous insurers and reinsurers.
Since the rate was cut to negative territory by the then Lord Chancellor and Justice Secretary, Liz Truss, numerous industry observers, participants, experts and analysts have called for changes to the method for calculating the Ogden rate.
Following widespread industry scrutiny, current Lord Chancellor and Justice Secretary, David Lidington, presented to Parliament draft legislation exploring how the rate should be set in the future.
Ultimately, the government proposes to maintain the objective that claimants should receive 100% compensation for losses incurred, and calls for the discount rate to be set on the assumption that claimants will invest lump-sums in low risk investments, as opposed to being set with reference to returns from very low risk Index Linked Government Securities.
In light of this, the Justice Committee was asked to undertake pre-legislative scrutiny of the clause outlined in the draft legislation, which it has now published in a new report.
The report calls for greater clarity on what the government means by full compensation, stating that lump-sums will nearly always be under or overcompensated, and also calls for evidence to be obtained surrounding how claimants invest their lump-sums, in light of the proposed change to how the rate is calculated.
Committee Chair, Bob Neill MP, said; “Setting the discount rate is much more than a technical decision. It is about how we as a society treat people who have been seriously injured, whether through medical negligence, road traffic accidents or by other means. It involves balancing the interests of claimants with defendants, and also balancing the social costs of increased clinical negligence payouts and increased insurance premiums with protecting the interests of vulnerable claimants.
“If the Government remains convinced that it must change the assumptions it makes about how damages will be invested, to adjust the balance between the interests of different groups in society, it should say so. It is vitally important that we get this right, and that changes are evidence-based.”
As well as other recommendations provided by the Committee in its pre-legislative scrutiny, the British Insurance Brokers’ Association (BIBA) has also commented on the report.
“We welcome the Committee’s scrutiny of this vital piece of draft legislation. Currently, a Discount Rate -0.75% suggests that claimants lose money from investments, rather than them attracting an investment income. This is clearly not the case and underlines why this legislation is urgently needed.
“The Committee has indicated it would like to see more evidence of how claimants invest their damage awards if the Government wants to maintain the objective of 100% compensation – something which is fundamental to the principle of indemnity in insurance,” said BIBA’s Executive Director, Graeme Trudgill.
But while Trudgill said that more evidence would certainly be useful, he stressed that the Government already has significant evidence to show that claimants don’t lose money from their investments, stating that any additional delay would make the broader social issues worse than the initial cut to -0.75%.
“In our evidence to the Committee, we emphasised the impact that a minus discount rate has upon our members’ customers namely significantly increasing premiums, particularly for young drivers. Following the rate change, there has been a 10% increase in the rate of uninsured driving claims.
“Furthermore, standard liability limits of cover which were arranged when the discount rate was 2.5%, may now be insufficient – putting firms, specifically small businesses, at risk of underinsurance and bankruptcy should a significant liability claim arise. We suggest customers who are concerned should speak to their insurance broker to review their limits.
“We look forward to Government identifying a suitable Bill to take these clauses forward at the soonest opportunity,” said Trudgill.
